Target-Date Funds Continue to Be Popular Among Younger 401(k) Plan Participants

Research on 2019 dataset from EBRI/ICI database finds the bulk of assets overall were invested in stocks.

More 401(k) plan participants held equities at year-end 2019 than at year-end 2007—before the financial market crisis—and most had the majority of their accounts invested in equities, based on an updated joint study released today by the Investment Company Institute and the Employee Benefit Research Institute.

The study, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2019,” found that among participants in their twenties, 54.1% of their 401(k) assets were invested in TDFs at year-end 2019, compared with 28.8% among participants in their sixties. In the year studied, 31.3% of 401(k) assets in the database overall were invested in target-date funds, up from 26.6% at year-end 2018.

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On average, at year-end 2019, 68% of 401(k) participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds and company stock. Twenty-nine 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.

The report also found that 401(k) participants’ investment in company stock continued at historically low levels at the end of 2019, with just five percent of 401(k) assets invested in company stock, in line with recent years.

Target-date funds were available in 87% of the 401(k) plans in the 2019 database. These plans offered target-date funds to 87% of the participants in the database. Sixty percent of all 401(k) plan participants in the database held TDFs, while 69% of participants offered them held the funds. TDF assets totaled 31% of all 401(k) plan assets and 35% of the assets of plans offering TDFs.

As in prior years, the 2019 data shows that participants’ asset allocation varied with age. Younger participants favored equity funds and balanced funds, while older participants were more likely to invest in fixed-income securities such as bond funds, money funds or GICs and other stable value funds.

The study also found that age and tenure with an employer continues to have significant impact on 401(k) account balances. At year-end 2019, participants in their forties with more than five years of tenure had an average 401(k) plan account balance of about $43,000, compared with an average 401(k) plan account balance of more than $330,000 among participants in their sixties with more than 30 years of tenure.

The research also found that a minority of 401(k) participants had loans outstanding. At year-end 2019, 18% of all 401(k) participants eligible for loans had loans outstanding against their 401(k) plan accounts, down slightly from year-end 2018. The size of outstanding loans relative to the size of a participant’s account was also smaller year-over-year, amounting to 8% of the remaining account balance, on average, at year-end 2019, down 2 percentage points from year-end 2018, and well below the historical average. Loan amounts, on average, also decreased in 2019.

The 2019 EBRI/ICI 401(k) database contains information on 73,312 401(k) plans with $0.9 trillion in assets and 11.1 million participants. The database includes 401(k) participants across a wide range of age and tenure groups. For year-end 2019, 48% of participants were in their thirties or forties, while 14% of participants were in their twenties, 25% were in their fifties and 13 % were in their sixties.  

In this dataset, the average account balance was $81,201 and the median account balance was $17,760.

Consensus Builds Around Early Financial Education

The vast majority of U.S. adults think their state should require a semester- or year-long course in personal finance education prior to high school graduation.

A new poll from the National Endowment for Financial Education suggests that Americans overwhelmingly believe that financial education at an early age is important, with national support growing for personal finance to be a part of curricula in all schools.

The poll highlights states such as Florida and Tennessee that have laws requiring schools to teach a financial education course. According to NEFE, there are currently 52 bills proposed in 26 states, including Georgia and Minnesota, addressing personal finance education at the K-12 level.

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“These leaders collectively acknowledge that young people depend upon financial knowledge to prevent common mistakes in early adulthood,” NEFE says. “While parents are pivotal in teaching, influencing and role modeling, state curriculum helps bridge this gap. It is heartening to witness the growing trend of states prioritizing financial education in public schools.”

The poll shows that 88% of U.S. adults say they think their state should require a semester- or year-long course in personal finance prior to high school graduation. Another 80% of U.S. adults say they wish they had been required to take such a course during high school.

NEFE finds 75% of U.S. adults consider spending and budgeting to be among the most important topics to teach in personal finance instruction, followed by managing credit (55%), saving (49%) and earning income (47%).

Students from states that already require a financial education course are more likely to display positive financial behaviors—especially when paired with a well-trained teacher. According to NEFE, the data reinforce that financial education matters and helps to establishes a solid foundation for how individuals will manage their financial lives as they emerge into adulthood.

“Conversations around financial topics are critical to start at an early age because parents need to help mold a child’s mindset and habits as they relate to money,” says Anthony Delauney, financial adviser and author of “The No-Regrets Retirement Roadmap” and the children’s book “Dash and Nikki and the Jellybean Game.”

Delauney says the same idea is true for how children relate to food, care for their bodies, treat others and build study habits.

“We develop habits very early in life,” he says. “The longer that we persist with those habits, the more engrained they become in us.”

Teaching children to have an open, respectful and comfortable relationship with money at an early age before they start earning it allows them to be better prepared when cash starts flowing into their bank accounts, Delauney says. Because children could pick up poor financial habits from outside influences, starting education early at home and in school is important.

As things stand today, students in well-resourced school districts are far more likely to receive personal finance instruction, according to NEFE data. The poll suggests that targeted legislative action, such as state support and access to trusted public resources, can help to mitigate uneven learning experiences.

But, NEFE experts warn, just because a state has a financial education mandate in place does not mean it will be effective. The poll suggests that the instruction must be “targeted, appropriate and measured,” and that teachers be confident and trained to deliver it adequately.

Delauney suggests parents looking to start this conversation with their children “treat them as adults” and allow them to think for themselves. Parents shouldn’t force their child to do what they say, but instead allow them to take ownership of the task or discussion.

“For example, take a child to the grocery store and say that we only have $40 to spend on groceries for the family for the week,” he proposes. “Ask them what things they think they should buy. If they immediately go to the candy aisle, ask if they think it is a good idea to make everyone eat just candy, or if they want to get something healthy for the family. Help them feel like they are in charge.”

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