401(k) balances increase, but so do loans outstanding

The average 401(k) balance skyrocketed nearly 32% in 2009 more than making up for the massive losses of 2008.

But more participants took loans against their 401(k)s - a dangerous trend that could lead to a decrease in retirement savings, according to a report released on Monday by the Employee Benefit Research Institute and the Investment Company Institute  analyzing a group of consistent participants.

Meanwhile, more and more young and newly-hired employees are choosing target-date funds for their retirement accounts, although overall target-date funds represent only one-tenth of 401(k) assets.

The rise in 2009 was in line with the 2003–2007 pattern of steady increase in account balances and in contrast to the 27.8% decline in 2008, according to the EBRI/ICI report, "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2009."

The report is based on the records of 20.7 million participants at the end of 2009, including 4.3 million participants who have had 401(k) accounts with the same 401(k) plan each year from year-end 2003 through year-end 2009.

"Retirement savers, by continuing to invest paycheck-by-paycheck, saw the benefits of being in the market in 2009, as stock values generally climbed during the year, said Sarah Holden, ICI senior director of retirement and investor research, in a statement.

Although 401(k) balances fluctuate based on the stock market, between 2003 and 2009 consistent participants saw an average annual growth rate of 10.5%, jumping to $109,723 as of Dec. 31, 2009, up from $61,106 at year-end 2003. 

Meanwhile, the Standard & Poor’s 500 stock index rose 26.5% in 2009, while the Russell 2000 index, which measures the small-cap segment of U.S. stocks, shot up 27.2%.

Even though 401(k) balances are growing, 21% of participants in plans offering loans had loans outstanding, an increase from the 18% on Dec. 31, 2008 and Dec. 31, 2007. At the end of 2009, 89% of 401(k) participants were in plans offering loans.

While more participants are taking out loans on their retirement accounts, fewer are investing in company stock, with the percentage falling by half of a percentage point to 9.2% in 2009.  Recently hired 401(k) participants were generally less likely to hold employer stock, the report said.

The majority of 401(k) assets continued to be invested in stocks, with on average 60% of 401(k) participants’ assets invested in equity securities. Thirty-six percent were in bond securities.

By the end of 2009, 31% of the account balances of recently hired participants in their 20s were invested in target-date funds, a jump of almost 23% from year-end 2008.


Ruthie Ackerman is the online editor of Financial Planning magazine, a SourceMedia publication.Follow EBN on: Twitter | Facebook | LinkedIn | Podcasts

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