In the five years since the end of 1999 through 2004, those Americans who consistently maintained their 401(k) accounts in that time period saw their balances rise 36% to an average of $91,042, according to a study released last week by the Employee Benefit Research Institute and the Investment Company Institute.

The average account balance increased 15% just in the year ending 2004. At the end of 1999, the average 401(k) balance among these consistent contributors was $67,016.

The study concluded that the averages depended heavily on people's age, contribution rates and the impact of equity markets and noted that "consistent participation had a significant impact on individuals' ability to accumulate sizeable gains in 401(k) account balances since 1999, despite [investors] enduring one of the worst bear markets since the Great Depression."

"Today ICI and EBRI jointly put out an authoritative 401(k) study, which is a unique analysis of actual plan participants' account balances and behavior," said Jack VanDerhei, research director of the EBRI fellows program. "The EBRI/ICI 401(k) database is the world's largest repository of information on 401(k) plan participants. No other has this range of information," he added.

As of the end of 2004, the EBRI/ICI database tracked 16.3 million 401(k) investors representing 38% of all of the nation's 401(k) participants. This represented $926.2 billion in assets, or 44% of the nation's total 401(k) assets, in 45,783 plans, or 10% of the nation's total plans.

The average 401(k) account balance of all the participants at the end of 2004 was $56,878, a 10.3% increase from an average of $51,569 at the end of 2003. The mean account balance at the end of 2004 was $19,926, an 11.26% increase from $17,909 at the end of 2003.

VanDerhei emphasized that the study shows the importance of consistently contributing to one's 410(k) plan, which is why all of the averages and increases in account balances were gathered from accounts that have been maintained for at least five years. Had the unpreserved accounts been included in the study, the results would have been very different, he noted.

EBRI and ICI found three key features that add to the shifts in a plan participant's account balance: new contributions to the plan by the employer or the participant; the total investment profit on account balances; and withdrawals, borrowing and loan repayments.

The sharp increase in account balances among 401(k) accounts consistently maintained in the five years since 1999 is also largely due to the revival of the stock market since 2002, the report noted (see chart).

Another interesting finding of the report is that the average account balances of those individuals in their 20s went up by a whopping 206% in the five-year period, from an average 401(k) account balance of $10,410 in 1999 to $31,844 in 2004. The explanation behind this is that most people in this age group have small account balances and, therefore, any contributions they make greatly impact their balances. More than half of the participants with small accounts are new to their jobs, the study revealed, and account balances increase with age and years of service.

On the other hand, older plan participants' contributions, while larger due to extra years of service and higher salaries, have not been able to help these 401(k) accounts sufficiently recover from the bear market, noted Sarah Holden, senior economist at ICI. For example, the average account of consistent contributors in their 60s has declined 4.7% from $143,161 in 1999 to $136,400 in 2004.

"This decline in assets reflects the magnitude of the impact of investment returns on these larger account balances, while annual contributions are able to provide only a minor boost to large account balances," the report found. In addition, older individuals are more likely to make withdrawals.

However, for all age groups, continuous contributions during the bear market mitigated the impact of the market decline on their account balances. "Little by little, paycheck by paycheck will help to build that nest egg," Holden said.

The study also found that "consistent with a long-term investment horizon, 401(k) plan participants are heavily invested in equity securities." At the end of 2004, 46% of plan participants' account balances were invested in equity funds. In total, the equity portion of balanced funds, including both securities and company stock, makes up a total of about two-thirds of 401(k) plan participants' assets.

Younger 401(k) plan participants favor equities more than older ones, who tend to favor fixed income, such as bond funds. On average, participants in their 20s have 52% of their account balances invested in equity funds, compared with about 37% of account balances for participants in their 60s invested in equity funds.

Investment preferences overall have also shifted, according to the study. Lifestyle and lifecycle funds have become quite popular recently because many prefer investment guidance or simple investment choices. In fact, the study found lifestyle and lifecycle funds to be equally popular among people in their 20s and their 60s, with 16% of people in their 20s and 15.6% of people in their 60s invested in these balanced types of funds in 2004.

Due to the shift in investment preferences, "reliance on company stocks has been dissipating," Holden noted.

The study also revealed that even though loans are available in many 401(k)s, and appear to help increase participation and contribution rates, investors rarely take out a loan. In 2004, only 19% of those in plans that offered loans had made use of this borrowing privilege, with average unpaid balances of $6,946.

(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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