Participants in 401(k) plans saw their account balances grow by more than 29% last year, evidence that despite a difficult bear market in previous years, investors are still turning to the vehicle as an effective way to save over the long-term. This is according to a recent study released by the Investment Company Institute and the Employee Benefit Research Institute.

The average balance for all accounts held since at least 1999 jumped 29.1% to $76,809 in 2003, from the $59,510 the previous year. The increase marks a significant turnaround from 2002, when the average account balance dropped 7.9% amid a 22% fall in the broad stock market indices. It also shows that overall balances are up 17% from the $65,572 average posted in 1999, leading to an annual increase of about 4%. The changes are due to a combination of factors in addition to investment performance and include contributions, withdrawals, borrowing and loan repayment.

In order to remove complications in the data that may have arisen from participants entering and leaving the database from which the ICI and EBRI pull their numbers, the study analyzed the change in account balances for a group of participants who held accounts at the close of each year from 1999 to 2003. They chose year-end 1999 due to its close proximity to the height of the bull market in equities.

"The data suggests that 401(k) participants view their plans as a steady, long-term investment, which is an encouraging finding," said Sarah Holden, co-author of the report and ICI senior economist. "The average account balance declines that occurred during the bear market did not deter participants from continuing to invest in their 401(k) plans."

The study's authors, which in addition to Holden include Jack VanDerhei, a Temple University professor and EBRI fellow, determined that age was also a major factor when examining the statistics. The younger the investor, the greater percentage increase they experienced in their account last year. Workers in their 20s saw their average balance rise 51% to $23,888, while those in their 30s experienced a 38.6% bump-up to $50,937 in 2003. These high percentage gains were aided by the fact that younger investors generally have lower account balances and continuing contributions make up a larger portion of their overall balance.

As the participants' age rises, their increases decline. Account levels for workers in their 40s grew by 31.6% to $82,999, while those in their 50s saw a 24.5% increase, and the account balances of those in their 60s rose 14.9% in the year. Older investors tend to withdraw from their 401(k)s to help supplement retirement income, but the data suggests that older participants have not yet recovered from the pains of the three-year bear market in equities, according to the study. For example, a participant with more than 30 years of job tenure and in their 50s as of last year had a balance 9.3% below their year-end 1999 level.

Younger investors also showed a penchant for investing in equity assets when compared to older participants, who gravitated more towards fixed-income assets. The study, the eighth annual report of its kind from the ICI and EBRI, concluded that despite market volatility, about two-thirds, or 67%, of 401(k) account assets were invested in stocks as of the end of last year. This number is comprised of investments in equity funds, the equity portion of balanced funds and company stock and represents a five percentage-point increase from the 62% shown in 2002. About 45% of participant assets were in equity funds, while 16% was invested in company stock, 9% in balanced funds and 10% in bond funds. Guaranteed investment contracts and other stable-value vehicles made up 13% of the allocation, and 5% was in money funds.

"The asset-allocation patterns we have seen for participants in recent years continued in 2003," Holden said. "Younger participants tended to hold higher allocations of equity assets, while older participants tended to invest more in fixed-income assets. These snapshots suggest that participants generally understand the principles of the 401(k) and are putting it to work effectively for their retirement," she said.

The ICI/EBRI database includes statistics on about 15 million 401(k) plan participants in more than 45,000 employer-sponsored 401(k) plans with approximately $776 billion in assets. Last yea,r approximately 42 million U.S. workers participated in 401(k) plans representing about $1.9 trillion in assets.

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