Report Paints 401(k) Investors as Steadfast

By Kathy M. Kristof

Aug. 10, 2004 12 AM PT

Times Staff Writer

Most workers who are saving via company-sponsored 401(k) retirement programs appear to have stuck with the plans through the recent bear market on Wall Street and may be in better long-term financial shape than is popularly imagined, a report issued Monday said.

The average 401(k) balance jumped 29.1% in 2003, to $76,809 at year’s end, driven by the stock market’s rebound and consistent contributions by plan participants, according to the study by the Employee Benefit Research Institute and the Investment Company Institute.

“The data suggest that 401(k) participants view their plans as a steady, long-term investment,” said Sarah Holden, co-author of the report and senior economist at the Investment Company Institute, the mutual fund industry’s main trade group.

“The average account balance declines that occurred during the bear market did not deter participants from continuing to invest in their 401(k) plans,” she said.

The stock market slumped from 2000 through 2002, and the average 401(k) balance fell from $65,572 at the end of 1999 to $59,510 by the end of 2002, a 9.2% decline.

Account balances reflect ongoing contributions by workers and their companies, and the performance of the investments in the accounts.

The Employee Benefit Research Institute and the Investment Company Institute have sponsored annual updates on the state of tax-deferred 401(k) plans since 1996. The 2003 report covers 15 million 401(k) investors.

Each year, the reports have focused in part on how investors divvy up their savings among stocks, bonds, money market accounts and other plan options.

The latest report lauds 401(k) investors for making, and staying with, asset choices that mirror what financial advisors generally recommend.

For example, younger plan participants tend to have the majority of their assets in stocks, which are higher risk than other plan options but should generate higher returns over time.

Older investors tilt their portfolios more toward less-volatile fixed-income options, the report showed.

Investors in their 30s had 54.2% of 401(k) plan assets in stock mutual funds last year, on average, the report said.

By contrast, investors in their 60s had 35.1% in stock funds.

The average stock-fund allocation across all age groups was 44.6%, the report said.

Investors in their 60s had 22.1% of plan assets in so-called stable value accounts, which promise a fixed interest rate and no risk to principal values.

Those accounts had just 5.9% of the assets of people in their 30s.

“These snapshots suggest that participants generally understand the principles of the 401(k) and are putting them to work effectively for their retirement,” Holden said.

The study builds on previous retirement research that suggests that baby boomers who save consistently may retire far more richly than some have speculated -- even though many workers no longer are covered by traditional company pensions, said Jack VanDerhei, a business professor at Temple University and co-author of the report.

The key to long-term success is to continue making regular 401(k) contributions and to avoid becoming too conservative in one’s asset mix, financial advisors say.

If investors gave up on their 401(k) plans in periods of poor market returns or switched heavily to safe but low-yielding investments when stock prices fell, it could drastically cut their retirement readiness in the end, VanDerhei said.

The 2003 study of 401(k) investors shows that most have remained steadfast despite the long bear market.

Stock funds constituted 53% of all 401(k) assets in 1999, when the market was peaking. The decline to 44.6% of assets at the end of last year was largely explained by the drop in share prices rather than by a shift in how plan participants invested their money, the report said.

“I think there’s been an enlightenment among individual investors over the past several years,” said Victoria Collins, a principal with Keller Group, an Irvine-based investment management firm. “There is less procrastination and more understanding that you have to get your money working for you if you want to maintain a quality of life in the future.”

Mark Wilson, a financial planner with Tarbox Equity in Newport Beach, said some investors may have benefited in recent years from simple inertia.

“Once something’s in motion, people tend to stick with it,” he said. “If they were making daily decisions about whether they wanted to invest, they would probably not have invested wisely. But the same inertia that caused them to continue to invest also probably caused them not to shift their investments around.”

Other findings in the 401(k) report:

* Employer stock accounted for 16.4% of investors’ plan assets in 2003, down from 19% in 1999. Financial advisors say many investors continue to hold too much of their savings in their own company’s stock, given the risks exposed by the failures of Enron Corp. and other corporate giants in recent years.

* Bond mutual funds, at 9.8% of plan assets last year, had doubled their share since 1999. During the bear market in stocks many investors learned the diversification benefits that bonds bring to a portfolio, experts say.

* Older and longer-tenured workers have not completely recovered from the bear market. While the average account balance for all workers is up 17% from 1999, the average plan participant in his 60s had $127,130 at the end of last year -- 9% less than the $139,317 he had at the end of 1999.

That’s largely because older workers’ contributions account for a smaller portion of their total balance than in the case of younger workers.

As a result, for older workers new contributions have less of an effect on account balances than market performance in a given period.

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Where the 401(k) money is

Average asset allocation within 401(k) accounts, year-end 2003, as a percentage of total assets

Stock funds: 44.6%

Employer stock: 16.4%

Stable value/GICs*: 12.9%

Bond funds: 9.8%

Balanced funds: 9.5%

Money funds: 4.7%

Other: 2.1%