Consistent participation is key to growing your 401(k)

Want to improve your retirement savings? Strive to participate in your company retirement plan - and stay in it. A study by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) found that workers who were consistent about participating in a single company's 401(k) plan were more successful at accumulating retirement assets than those who were inconsistent.
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Key findings from the EBRI study include the following:

• The average 401(k) plan account balance for those workers who participated in their employer's retirement plan for four or more years rose each year from 2010 through year-end 2016. Overall, the average account balance increased at a compound annual average growth rate of 14.2% from 2010 to 2016, to $167,330 at year-end 2016.
• The growth in account balances for consistent participants greatly exceeded the growth rate for all participants in the EBRI/ICI 401(k) database.
• At year-end 2016, the average account balance among consistent participants was more than double the average account balance among all participants in the EBRI/ICI 401(k) database. The consistent group's median balance was nearly five times the median balance across all participants at year-end 2016. 

The study found that the advantage to consistent participants was consistent for all age groups. Account balances reflect both employee contributions and employer matching contributions.

The research is important because previous surveys did not bifurcate their data between consistent participants and those whose contribution records were irregular, for whatever reason. The same was true for short-lived plans from employers who started plans and then who went out of business, for whatever reason. These groups were distorting previous studies and skewing records of average balances downward.

"Looking at average balances for all 401(k) accounts does not reflect the system's full potential for workers building their retirement resources," said Sarah Holden, ICI's senior director of retirement and investor research. "By studying the experience of workers who participate consistently across several years, this study shows more accurately the extent to which steady, paycheck-by-paycheck saving and compounding investment returns can help workers accumulate a sizable retirement nest egg."

Other findings 

• Younger 401(k) participants or those with smaller year-end 2010 balances experienced higher percent growth in account balances compared with older participants or those with larger year-end 2010 balances. Three primary factors affect account balances: contributions, investment returns, and withdrawal and loan activity. 
• The percent change in average 401(k) plan account balance of participants in their 20s was heavily influenced by the relative size of their contributions to their account balances, and increased at a compound average growth rate of 43.5% per year between year-end 2010 and year-end 2016.
• 401(k) plan investments are stock-heavy. On average at year-end 2016, about two-thirds of 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.
• Roughly three out of four 401(k) participants in their 20s had 80% stock exposure in their 401(k)s at the end of 2016.
• Older participants were more likely to invest in fixed-income securities such as bond funds, money funds, or guaranteed investment contracts and other stable-value funds. 
• Seven out of ten 401(k) plans included target date funds in their approved offerings and represented 18% of assets.
• Company stock represents only about 7% of 401(k) assets as of year-end 2014 - roughly the same level as 2014.