401(k) Planning

Target-Date Funds, Equities, Remain Popular Investments In 401(k) Plans

Younger investors are more likely to hold them, and hold more of them, than older investors

Recent market research from the Employee Benefit Research Institute (EBRI) reveals a continued engagement with equities in the 401(k) space. Access the full report here.

A new study from EBRI and the Investment Company Institute (ICI) finds target-date funds are a popular choice for 401(k) plans’ investment lineups. The study, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2018,” finds that younger 401(k) plan participants have large allocations to target-date funds, being both more likely to hold — and holding more of their accounts in — target-date funds than older participants.

At year-end 2018, 62 percent of 401(k) participants in their twenties held target-date funds, compared with half of 401(k) participants in their sixties. On average, 401(k) participants in their twenties held about half of their 401(k) plan account assets in target-date funds, compared with about 23 percent for 401(k) participants in their sixties.

Target-date funds are also used at a higher rate among recently hired plan participants. Among those with two or fewer years of tenure, 57 percent held target-date funds, compared with 54 percent of participants with more than five to 10 years of tenure, and 36 percent of participants with more than 30 years of tenure. Target-date funds are designed to offer a diversified portfolio that focuses on growth for younger participants and automatically rebalances to focus more on fixed-income investments for workers as they near — and enter — retirement.

The Kids Love Equities

The study also shows that more 401(k) plan participants held equities at year-end 2018 than before the financial crisis of 2008. Data show that equities are an especially popular investment choice for younger plan participants. About three-quarters of participants in their twenties had more than 80 percent of their 401(k) plan accounts invested in equities at year-end 2018, up from less than half of participants in their twenties at year-end 2007. In comparison, about 14 percent of participants in their sixties and 44 percent of 401(k) plan participants overall had more than 80 percent of their 401(k) plan accounts invested in equities at year-end 2018.

“Equities continue to be an attractive investment choice for 401(k) plan participants,” said Jack VanDerhei, EBRI Research Director. “This is largely driven by younger plan participants who remain focused on growth as they invest in their futures.”

A Summary From The EBRI Issue Brief: 401(k) Plan Asset Allocation Activity

Since 1996, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) have worked together on collecting and analyzing annual data on millions of 401(k) plan participants’ accounts. This report reflects the year-end 2018 update of these data and EBRI and ICI’s ongoing research into 401(k) plan participants’ activity.

Key Findings:

The bulk of 401(k) assets were invested in stocks. On average, at year-end 2018, 63 percent of 401(k) participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Twenty-eight percent of assets were in fixed-income securities such as stable-value investments, bond funds, money funds, and the fixed-income portion of balanced funds.

Equities continue to be an attractive investment choice for 401(k) plan participants. This is largely driven by younger plan participants who remain focused on growth as they invest in their futures...

More 401(k) plan participants held equities at year-end 2018 than before the financial market crisis (year-end 2007), and most had the majority of their accounts invested in equities. For example, about three-quarters of participants in their twenties had more than 80 percent of their 401(k) plan accounts invested in equities at year-end 2018, up from less than half of participants in their twenties at year-end 2007. Overall, more than 90 percent of 401(k) participants had at least some investment in equities at year-end 2018.

More than three-quarters of 401(k) plans, covering more than three-quarters of 401(k) plan participants, included target-date funds in their investment lineup at year-end 2018. At year-end 2018, 27 percent of the assets in the EBRI/ICI 401(k) database were invested in target-date funds and more than half of 401(k) participants in the database held target-date funds. Also known as lifecycle funds, these funds are designed to offer a diversified portfolio that automatically rebalances to be more focused on income over time.

401(k) participants’ investment in company stock continued at historically low levels. Five percent of 401(k) assets were invested in company stock at year-end 2018, in line with recent years. This share has fallen by 74 percent since 1999 when company stock accounted for 19 percent of assets.

A minority of 401(k) participants had loans outstanding. At year-end 2018, 19 percent of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) plan accounts, unchanged since 2016. Loans outstanding amounted to 10 percent of the remaining account balance, on average, at year-end 2018, up 1 percentage point from year-end 2017 but still below their historical average. Loan amounts also edged up a bit in 2018.

The year-end 2018 average 401(k) plan account balance in the database was 5.9 percent lower than the year before. This is consistent with stock market declines in 2018 but may not accurately reflect the experience of typical 401(k) participants. Among consistent participants in the EBRI/ICI database between 2010 and 2018, the average account balance was 0.7 percent lower at year-end 2018 than at year-end 2017. Changes in a participant’s account balance are primarily due to the combination of contributions, investment returns, and withdrawal and loan activity.

The average 401(k) plan account balance tends to increase with participant age and tenure. For example, at year-end 2018, participants in their forties with more than two to five years of tenure had an average 401(k) plan account balance of about $36,000, compared with an average 401(k) plan account balance of more than $306,000 among participants in their sixties with more than 30 years of tenure.

Learn more here.