Did the January Effect Affect 401(k) Balances?

As stock market indicators go, the so-called “January effect” seems to have been at play with average 401(k) balances.

The “January effect” holds that early-year stock market gains are driven by several “powerful” seasonal anomalies – and while that wouldn’t seem to hold as a motivator for 401(k) participants, an analysis by the nonpartisan Employee Benefit Research Institute (EBRI) found that the average account balance for younger (25-34), less tenured (1-4 years) workers rose by 3.2% in January, while those aged 55-64 with more than 20 years of tenure gained 1.6%.

Of course, younger workers have smaller balances, and that means that contribution flows, rather than market moves, generally have a larger effect on the rate of increase. On the other hand, older, higher tenured participants tend to have larger account balances, and the movement in average balance tends to be more influenced by market moves than contribution flows.

December Momentum

Proponents of the January effect claim that part of the early year increase in stock values is a rebound from sell-offs at the end of the year. However, December was a good month for average 401(k) balances as well, with the average account balance of younger (age 25-34), less tenured (1-4 years) workers soaring 3.3% for the month, while the average 401(k) balance of those aged 55-64 with more than 20 years of tenure rose 1.5%.

Those gains built on November’s increases, when the average account balance for younger (25-34), less tenured (1-4 years) workers rose 4.0%. While older (55-64) workers with more seniority (20-29 years of tenure) also gained ground, their rise was less spectacular: a 1.4% rise for the average account balance that basically wiped out their October loss (a 1.1% decline).

Those estimates were based on the actual contribution records and investment choices of several million consistent participants in the EBRI/ICI database. Drawing from that database, which 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 access reports of both cumulative and monthly average account changes here.

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