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Stock Surge Stokes Strong Start for Average 401(k) Balance

The “January effect” looks to be in full force for the average 401(k) balance.

That effect is a seasonal increase in stock prices during the month of January, which has been attributed to a number of things, generally a rebound from tax-loss related stock sales in December. And if December’s tumbles drew a lot of attention, it’s perhaps worth noting that in January the S&P 500 climbed 7.9% for its best January since 1987, while the Dow rose 7.2%, its best January since 1989, and the NASDAQ had its best January since 2001 on the back of a 9.7% monthly gain, according to CBS Marketwatch.

Regardless of the motivations, January was a good month for the markets, and – according to estimates from the nonpartisan Employee Benefit Research Institute (EBRI) – the average 401(k) account balance for younger (25-34), less tenured (1-4 years) workers surged 7.5% in January – a significant turnaround from December’s 4.9% drop.

As 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 climbed 5.4%, reversing the 4.7% decline in December. Remember that the EBRI estimates are based on the actual contribution records and investment choices of several million consistent participants in the EBRI/ICI database.

While 2018 didn’t end well, overall it was a good year for younger, less tenured 401(k) savers; the EBRI data indicates that their average 401(k) balance ended 2018 18.8% higher than it began the year. As for those older, more tenured workers? Not so much. The average 401(k) balance for that cohort slipped 0.3% year-to-date.

That analysis, based on EBRI’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.