NEW YORK – Slow and steady wins the race when it comes to retirement savings, according to a study of 401(k) accounts released Thursday.
The study by two Washington, D.C.-based associations found that workers who contributed to their company-sponsored 401(k) accounts over the past seven years saw their savings grow by more than 50 percent despite the punishing market downturn of 2000-2002.
Account balances for the long-term savers averaged $102,014 at the end of 2005, up from $67,785 at the end of 1999, according to statistics from the Employee Benefit Research Institute and the Investment Company Institute. EBRI is a nonprofit research center, while the ICI is a trade association of mutual fund companies.
Sarah Holden, a senior economist in ICI's research department and co-author of the report, said the results show “the significant power of regular, consistent savings behavior.”
That's important, she said, because many workers get discouraged when they think about how much they need to save for retirement.
“This shows that little by little, people are able to accumulate assets to reach that goal,” Holden said.
The 401(k) plans are named for a section of the tax code and allow participants to set aside pretax money for use in retirement. Employers often match some of the employee contributions, usually for a total of at least 3 percent.
As would be expected, balances in 401(k) accounts were higher for older workers than younger ones, the study found.
The average balance for long-term savers in their 60s was $140,957; in their 50s, $127,766; in their 40s, $91,848; in their 30s, $50,930; and in their 20s, $24,169.
The study also looked at how 401(k) savers allocated their funds. Among the findings:
At year's end, equities – stock funds, the equity portion of balanced funds, and company stock – made up 68 percent of participants' plan assets.
The money held in company stock has dropped from a high of 19 percent in 1999 to 13 percent in 2005. Too much company stock can put a saver's account at risk if something happens to the company or its share price.
Lifestyle and lifecycle funds have become more popular. They're now offered by nearly half of 401(k) plans, and new hires seem to find them an especially attractive investment.
Lifestyle funds follow a predetermined risk allocation, usually described as “conservative” or “moderate” or “aggressive.” Lifecycle funds reallocate risk over time, generally shifting from heavy stock holdings for younger workers to heavier bond allocations as they age.
Temple University professor Jack VanDerhei, who is an EBRI fellow and co-author of the study with Holden, said that the lifestyle and lifecycle funds were a good alternative for young savers hesitant to invest in equities on their own and for older workers who, perhaps out of loyalty, were too inclined to invest in their own company's stock.
He noted that the new pension reform bill recently signed by President Bush will allow for the automatic enrollment of employees into 401(k) plans and will allow their contributions to be placed into lifecycle or lifestyle funds.
“We could see a jump in participation” as companies adapt to the new law, he said.
The study also found that some 19 percent of participants took loans against their 401(k) accounts, with the unpaid balance averaging $6,820.
Holden said that research has shown that some workers are willing to participate in 401(k) plans – and will contribute more money – if they know they can tap the funds in emergencies. She said that most workers who do borrow against their 401(k)s pay the loans back.
