Younger Participant Retirement Savings Are on the Rise

401k Plan DesignYounger participant retirement savings are turning out to be a good-news story these days.  For those who are curious, 401(k) plans remain a powerful retirement savings tools.  New research finds that younger participant retirement savings in 401(k) plans are trending positively.  Younger participant retirement savings account balances increased from 2016 to 2020, according to recent research from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).  EBRI and ICI found that consistent participants’ account balances rose each year from year-end 2016 through year-end 2020. The increases reflected a compound annual average growth rate (CAGR) of 19.4% over the period, with the average account balance rising from $78,008 at year-end 2016 to $158,361 at year-end 2020.

Three primary factors drove the increase in younger participant retirement savings account balances: contributions by participants, employers, or both; investment returns; and withdrawal and loan activity.  Younger participant retirement savings were more likely to experience higher account balance growth than older participants, who tend to have larger account balances on average, according to the EBRI/ICI data. The percent change in balance for younger participants was influenced by the relative size of their contributions to their account balances.

Other key findings from the EBRI/ICI report include:

  • The median 401(k) plan account balance for consistent participants increased at a compound annual average growth rate of 28.3% over the period, to $62,134 at year-end 2020.
  • Younger participant account savings with smaller year-end 2016 balances experienced higher percent growth in account balances compared with older participants or those with larger year-end 2016 balances.  Because younger participants’ account balances tended to be smaller, their contributions produced significant percentage growth in their account balances.
  • 401(k) participants tend to concentrate their accounts in equity securities.  On average at year-end 2020, more than two-thirds of consistent 401(k) participants’ assets were invested in equities—through equity funds, the equity portion of target date funds, the equity portion of non–target date balanced funds, or company stock.  Younger 401(k) participants tend to have higher concentrations in equities than older 401(k) participants.  This may indicate that younger participants understand the correlation between the amount of time they have until retirement—which may be as much as 30 years off—and the amount of risk they can take in their portfolio.  In other words, because they have a longer time horizon until retirement, they can “afford” to take on more risk in their investments, and therefore, allocate a larger percentage of their portfolios to equities.

While it appears younger participant retirement savings accounts have continued to grow in recent years.  Market volatility and the potential of a recession may cause them to panic, especially if they haven’t experienced a market downturn before.  Employers and financial advisors have an opportunity to educate 401(k) plan participants on the importance of staying the course with their investment strategy and not trying to “time the market.” As the old adage goes, time in the market is more impactful than timing the market. Financial wellness programs, ongoing retirement planning education, and additional 1:1 time with financial professionals, if available, may help participants make more informed decisions about their retirement savings and investing strategies in the face of challenging markets.


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