401(k) plan asset allocation, account balances, and loan activity in 1998

Area of Science:

• Retirement Planning
• Behavioral Finance
• Investment Management

Background:

• The Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI) collaborated on the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project.
• This project gathered data from record keepers and administrators of 401(k) plans.

Purpose of the Study:

• To analyze 401(k) plan participant data, including demographics, contributions, balances, asset allocation, and loans.
• To understand how participant characteristics and plan features influence investment decisions.

Main Methods:

• Utilized data from 7.9 million active participants across 30,102 plans for 1998.
• Incorporated three years of longitudinal data for approximately 3.3 million participants.
• Analyzed asset allocation, account balances, and their relationship with age, tenure, and salary.

Main Results:

• Nearly three-quarters of 401(k) plan balances were invested in equity securities (equity funds, company stock).
• Asset allocation significantly varied by age, with younger participants favoring equities and older participants favoring guaranteed investment contracts (GICs) and bond funds.
• Average account balances (net of loans) reached $47,004 by year-end 1998, a 26% increase from 1996. Balances for individuals in their 60s with long tenure exceeded $185,000.

Conclusions:

• 401(k) investment strategies are influenced by participant age and the availability of specific investment options like company stock and GICs.
• Long-term participation in 401(k) plans can lead to substantial retirement savings, particularly for older workers with consistent employment.
• Contribution limits and nondiscrimination rules may affect the savings ratio for high-income earners.