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Attention 401(k) Participants: Consistency May Pay Off, Study Finds

Despite the stock market drops of 2008, the average account balance of 401(k) participants who continued investing during the five-year period ending December 31, 2012, grew by a compound average annual rate of 6.8%, according to a study released jointly by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

The study, "What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007-2012," analyzed 7.5 million 401(k) plan participants in the EBRI/ICI 401(k) database who participated in their plans consistently throughout the five-year period, comparing their results with the broader database of 24 million participants. The broader database also includes those who had enrolled in or dropped out of their plans during that time frame.

"This research provides a meaningful analysis of the potential for 401(k) participants to accumulate retirement assets because it examines how a consistent group of participants' 401(k) accounts change over time," said Sarah Holden, senior director of retirement and investor research at the ICI.

Over the analyzed period, the average account balance for consistent participants grew from $77,049 at the end of 2007 to $107,053 at year-end 2012; this was significantly higher than the 2012 average balance of the broader group ($63,929). The median account balance for consistent participants at the end of 2012 was $49,814, almost three times higher than the median balance of the larger group ($17,630).

"The research highlights that contributing and investing in a 401(k) plan consistently results in higher average account balances than the average balance for all plan participants," Holden said.

Growth rates took several factors into consideration, including employer and employee contributions, investment returns, withdrawals, and loans.

Getting granular

A closer examination of the figures illustrates the potential benefits of consistent participation. As of December 31, 2012, over 30% of the consistent participants had more than $100,000 in their 401(k) accounts, compared with just 18% of the broader group.

Most participants had at least a portion of their assets invested in stocks, either through stock funds, target-date funds, balanced funds, or company stock. Perhaps not surprisingly, younger participants tended toward higher stock allocations than older participants. The stock market drop notwithstanding, participant exposure to equities and target date funds among consistent participants changed only slightly during the five-year period. (Note that asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.)

Target-date fund usage on the rise

The share of consistent participants who included target-date funds in their portfolios rose from 27.6% to 32.1% between year-end 2007 and year-end 2012. While all age groups experienced slight increases in the usage of target-date funds, middle-aged folks (those in their 40s and 50s) saw the largest boost.

Among the entire EBRI/ICI database, the use of target-date funds rose substantially, from 25.1% at year-end 2007 to 41% by year-end 2012. The study's authors surmised that the rise was due in part to the increase in auto-enrollment and the use of target-date funds as the default investment, as well as the overall boost in plans offering target-date funds as an option.

In a target-date fund, the target date is the approximate date upon which an investor plans to withdraw money. The mix of investments in the target-date fund becomes conservative as the date grows closer. The principal value is not guaranteed at any time, including the target date. There is no guarantee that a target-date fund will meet its stated objectives. It is important to note that no two target-date funds with the same target date are alike.

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Kenneth S. Rakes has 25 years of experience in public accounting and is a graduate of John Carroll University. Ken provides tax planning and preparation services for individuals, partnerships, corporations, estates, and trusts. Ken is a Personal Financial Specialist (PFS) providing retirement, estate, investment, insurance, and education planning for individual clients with an emphasis on the tax implications of planning decisions. Ken's other areas of expertise include: Manufacturing, Wholesale, Retail and Service Industries, Non-Profit Organizations and Sub-Chapter "S" Corporations.