Report Highlights Impact of Tenure, Age in Tracking 401(k) Trends

A new report provides some interesting insights on 401(k) participants and their behaviors—and reminds of the challenges in tracking trendlines.

The report—aptly titled “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2022”—provides a snapshot on the how, and how much 401(k)s amounted to in 2022. An update of EBRI and ICI’s ongoing research into 401(k) plan participants’ activity—that’s the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI)—the report confirms some “truisms” (“average account balances tend to rise with age and tenure”) while also noting some trends that might be surprising (“Participants’ allocations to equity funds varied by age, with participants in their fifties having the highest average allocation and participants in their twenties the lowest”). 

The report noted that recently hired participants were more likely to hold target date funds than those with more years on the job, doubtless a function of the expanding embrace of automatic enrollment and/or qualified default investment alternatives, which tend to influence such things. At year-end 2022, 74% of participants with two or fewer years of tenure held target date funds, compared with (just) 42% of participants with more than 30 years of tenure. 

The report also provides some comforting details on participant loans. In the EBRI/ICI database, at year-end 2022, (just) 5% of 401(k) participants with access to loans had loans outstanding—though “only” 84% of the plans in that database allowed loans, and once you adjust for that, just 13% had loans outstanding at year-end 2022.

In fact, on average, over the past 25 years, among participants with loans outstanding, about 12% of the remaining account balances remained unpaid. And, unlike the typical cautionary headlines about leakage, the report notes that 94% of participants in their twenties, 80% of participants in their forties, and 88% of participants in their sixties had NO loans outstanding at year-end 2022.  Taking advantage of more specific demographic details, the report notes that participants with five or fewer years of tenure or with more than 30 years of tenure were less likely to use the loan provision than other participants. 

Consistent ‘Clarity’

The report also provides some important disclaimers about the importance of a consistent sample[i] of participants—something that annual reports of average account balances and the like tend to gloss over.

The report notes that “adding a large number of new plans with smaller balances to the database would tend to pull down the average account balance. This could then be mistakenly described as an indication that balances are declining, but it would tell us nothing about consistently participating workers.” Similar distortions could result if a large number of older participants retired—not to mention a large turnover in plans (and/or participant accounts) at an individual recordkeeper (the EBRI/ICI database includes the balances/activity of an undisclosed number).

The report also presents the potential distortions that can come from looking only at a factor like age without regard to things like tenure. It notes, for example, that the average account balance of participants in their sixties with up to two years of tenure was $46,609, but that average was $312,092 for participants in their sixties with more than 30 years of tenure. The average account balance of participants in their forties with up to two years of tenure was $20,996, compared with $164,865 for participants in their forties with more than 20 years of tenure. Most annual recordkeeper updates make no allowance for those kinds of differences. Indeed, most don’t even allow for a distinction based on age, much less tenure.

The report is available online at: https://www.ebri.org/401k-2022