Whether or not the so-called “January effect” was in force, the average 401(k) balance got 2020 off to a good start in January.
That “January effect” is, of course, a hypothesis that there is a seasonal anomaly in the financial market where securities’ prices increase in the month of January more than in any other month, a phenomena that was first observed around 1942 by investment banker Sidney B. Wachtel. The theories behind the theory are that investors sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year – or that they are investing year-end bonuses. Regardless, like the Super Bowl Indicator, it doesn’t always work.
Still, according to estimates from the nonpartisan Employee Benefit Research Institute (EBRI), in the first month of 2020, the average 401(k) account balance for younger (25-34), less tenured (1-4 years) workers rose 1.5%. For older (age 55-64) workers with more than 20 years of tenure, whose average balance is generally more influenced by market moves than contributions, the average 401(k) balance rose 1.0%.
Now, in fairness, that’s well off December’s pace of increases of 3.3% and 2.0%, respectively. Then again, the markets of late have been concerned about the potential economic impacts of the coronavirus.
That said, EBRI’s analysis, based on the organization’s huge database of some 26 million 401(k) plan participants in more than 101,000 employer-sponsored 401(k) plans representing nearly $2 trillion in assets, is unique because it includes data provided by a wide variety of plan recordkeepers and, therefore, portrays the activity of participants in 401(k) plans of varying sizes – from very large corporations to small businesses – with a variety of investment options.
The EBRI/ICI database includes demographic, contribution, asset allocation and loan and withdrawal activity information for millions of participants. EBRI has produced estimates of the cumulative changes in average account balances – both as a result of contributions and investment returns – for several combinations of participant age and tenure. You can find those results here.
