Two-Thirds of 401(k) Assets Held in Equities

However, at year-end 2015, for example, the ICI says participants in their twenties had 80% of their portfolios invested in equities, while participants in their sixties had 55% in equities.

Assets in 401(k) plans rose from $3.0 trillion in 2007 to $5.3 trillion as of September 30, 2017—a 77% increase in assets, according to data from the Investment Company Institute (ICI), in a new report, “Frequently Asked Questions About 401(k) Plan Research.”

In 2007, 401(k)s accounted for 17% of the U.S. retirement market. Today, that is 19%. In total, there are nearly 550,000 401(k) plans in the U.S. with 54 million Americans participating in them.

At year-end 2015, according to an Employee Benefits Research Institute (EBRI)/ICI database, 401(k) participants had 66% of their balances invested either directly or indirectly in equities, either through mutual funds or other pooled investments, company stock or the equity portion of balanced funds. Only 9% was invested in the fixed income portion of balanced funds, 8% in bond funds, 6% in guaranteed investment contracts and other stable value funds and 4% in money market funds.

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The younger the investor, the more likely they are to have their money invested in equities, while older investors are more likely to gravitate to fixed-income securities, including bond funds, money market funds, stable value funds and guaranteed investment contracts, ICI found. At year-end 2015, for example, participants in their twenties had 80% of their portfolios invested in equities. For 401(k) participants in their sixties, this drops to 55%.

Looking at the account records of 22 million defined contribution (DC) plan participants, ICI examined whether they retreated from these investments following the financial crisis of 2008, only to discover that a mere 3.7% of participants stopped contributing to their accounts, 14.4% changed the allocations of their balances, and 12.4% changed the allocations of their contributions. “These activities have become even less prevalent since 2008,” ICI says. “For example, an analysis of more than 29 million DC accounts in 2016 found that 2.7% of participants stopped contributing, 9.4% changed the asset allocation of their account balances, and 5.6% changed the asset allocation of new contributions.”

The EBRI/ICI database also shows that consistent participation in 401(k) plans pays off; workers who stayed the course in their 401(k) plan between year-end 2010 and year-end 2014 saw their balances grow at a compound annual average growth rate of 15.5%.

The majority of 401(k) plan assets, 65%, are invested in mutual funds. The remainder is in company stock, individual stocks and bonds, guaranteed investment contracts, bank collective trusts, life insurance separate accounts and other pooled investment products.

Mutual funds held in retirement accounts—individual retirement accounts and all types of DC plans, including 401(k)s—were $8.5 trillion as of September 30, 2017, or 47% of all mutual fund assets. Mutual fund assets in 401(k)s were $3.5 trillion, or 20% of the total mutual fund assets in the U.S.

ICI also learned that the older the worker and the longer their tenure with their company, the higher their account balance. “In the EBRI/ICI 401(k) database, participants in their thirties with more than two to five years of tenure had an average 401(k) plan account balance close to $25,000, compared with an average 401(k) account balance of nearly $275,000 among participants in their sixties, with more than 30 years of tenure,” ICI says. At year-end 2014, the median age of 401(k) participants was 46 and their median job tenure was eight years.

The EBRI/ICI database also showed the 87% of participants are in plans that offer loans, and among this group, 18% had loans outstanding as of the end of 2015, with an average balance of $7,982. This represents 12% of their average balance of $95,784. The younger the participant, the more likely they were to have a loan, with 25% of those in their twenties having an outstanding loan, 19% of those in their thirties, 9% of those in their fifties and 8% of those in their sixties.

ICI’s report, “Frequently Asked Questions About 401(k) Plan Research,” can be viewed here.

A Different Goal for Employers to Offer Wellness Programs

While wellness programs may benefit employees in poor health the most, a research study found it is those in the middle of the health care spending range that are most likely to participate in wellness programs, but this still could save employers money.

 

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According to a report of the research results, published by the National Bureau of Economic Research, the Illinois Workplace Wellness Study conducted at the University of Illinois at Urbana-Champaign used a comprehensive workplace wellness program that included an on-site biometric health screening, an online health risk assessment, and a wide variety of wellness activities (e.g., smoking cessation, stress management, and recreational classes). Those who successfully completed the entire program earned rewards ranging from $50 to $350, with the amounts randomly assigned and communicated at the start of the program. A control group was not permitted to participate. The analysis combines individual-level data from online surveys, university employment records, health insurance claims, campus gym visit records, and administrative records from a community running event.

 

The researchers found that 56% of employees in the treatment group completed the initial major component of the study, which included an on-campus health screening. Completion depended on the size of the monetary incentive assigned to an employee: increasing the screening completion reward from $0 to $100 boosted the completion rate by 12 percentage points, from 47% to 59%, but further increasing the reward to $200 only increased completion by 4 percentage points, to 63%.

 

The researchers conclude that the rapidly diminishing effect of wellness incentives implies that increasing a large financial incentive to even greater levels will transfer large sums of money to workplace wellness program participants, but will have little effect on their composition. They also found that incentives tied to completing downstream wellness activities are more cost-effective than up-front incentives tied to completing the initial health screening.

 

On the positive side, the research found annual medical spending among wellness program participants was $1,574 less than among non-participants, on average. But, a more detailed investigation revealed that this is concentrated in the middle of the spending distribution: employees in the upper and lower tails of the medical spending distribution were least likely to participate in the program.

 

The researchers found that wellness program participants were more likely to have visited campus recreational facilities prior to the study, and were more likely to have participated in prior community running events. They conclude that a primary benefit of wellness programs to employers may be their potential to attract and retain healthy workers with low medical spending, which could lower health benefit costs for employers.

 

Considering only health care costs, the researchers conclude that reducing the share of non-participating (high-medical-spending) employees by just 4.5 percentage points would suffice to cover the costs of the wellness program intervention. The patterns of participation researchers found are consistent with the concern that the benefits of workplace wellness programs are less likely to accrue to those with poor health or relatively low incomes, the paper says.

 

However, the researchers note that they only examined outcomes in the first year following the start of the study, and it is possible that meaningful effects may emerge in later years.

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