Do you get discouraged by news reports that harp on how small the average account balance is in 401(k) plans, and do the headlines make you feel like it’s futile to save?
Don’t get bummed out. And don’t interrupt your savings routine. Average balances can look puny because they include accounts that can’t help but be small. They can include accounts owned by young workers who are just starting out.
They can also include accounts owned by retirees who have been withdrawing money for many years. Or by workers who don’t contribute. Or people who’ve been laid-off.
It can be more encouraging to look at balances of accounts owned by people who are still working and have a track record of contributing to their accounts year after year.
That’s exactly what the Investment Company Institute (ICI) and Employee Benefit Research Institute (EBRI) do in a new study. They tote up balances in accounts to which workers have been contributing for at least the current year plus the prior three years. The study labels those workers “consistent participants.”
In fact, nearly 40% of all 401(k) plan members are consistent participants. On average they have much larger balances than other plan members. Since anyone can become a consistent participant, it pays to join that club.
Their accounts had an average balance of $170,290 as of year end 2014, the latest year for which complete data are available.
That’s more than twice the size of the $76,293 average account balance for all plan participants, whose ranks include young workers who may only have a small amount of money in their accounts or older workers who just switched jobs and also have small balances.
At each year’s end going back to at least 2010, the consistent plan members’ average balance was far larger than the overall average balance of all 401(k) plan members.
From 2007 through 2014, consistent plan members enjoyed an average annual growth rate of 11.2%.
And workers recognize the value of investing in stocks, directly or through mutual funds. While they can be more volatile in the short run, over time they grow more than bonds and cash.
Plan members overall averaged a 67% allocation to stocks in all forms as of year-end 2014 — company stocks, stock mutual funds, the stock portion of target-date funds and other balanced funds. Workers in their 20s and 30s averaged a nearly 78% stock allocation. Workers in their 60s averaged a 57% stock allocation.
Sixty-something workers had the largest bond allocations, with 10.4% at work in fixed income.
And workers generally make ample allocations to balanced funds, which hold both stocks and bonds. Overall, members of 401(k) plans allocated a little over 20% of their accounts to balanced funds on average. Workers in their 20s had the largest balanced-fund allocations on average, with a little more than 38% at work in those double-barreled funds.
That large allocation by young workers stems from the widening use of automatic enrollment to get young workers started with retirement savings. More and more plans are enrolling young workers in target-date funds by default if they don’t choose to be in some other investment instead. This prevents young workers from parking their contributions in cash or bonds, which grow much slower than stocks.
Target-date funds, which are a variety of balanced funds, give you professional management, which adjusts your allocations to stocks, bonds and cash as you age. That can be up to and sometimes right through your target retirement age. Target-date funds divvy up investors’ money between stocks and bonds and choose individual stocks and bonds for you. If you don’t have the time or interest in forming an investment strategy and selecting securities, a target-date fund puts the process on autopilot for you.
IBD’S TAKE: Read this IBD report to learn how target-date funds and managed accounts helped drive retirement account balances in plans run by Fidelity Investments up near record levels in the second quarter.
Workers can take away these pointers from the data in the ICI-EBRI study:
- Contribute to your retirement account on a regular basis. Your nest egg will grow more than if you start and stop and start again.
- Allocate as much of your contributions to stocks as you’re comfortable doing.
- Use target-date funds if you want help build a retirement nest egg, especially the diversified mutual-funds portion of your portfolio.