Younger 401(k) plan participants who saved consistently, as well as those with smaller year-end 2016 balances, experienced meaningfully higher growth in account balances compared with consistent older participants through 2020.
As explored in new research published by the Employee Benefit Research Institute and the Investment Company Institute, that trend in 401(k) account balance data reflects a much broader development taking root across the financial services system as the sizable baby boomer generation enters retirement and millennials approach their prime earning years.
Though their current wealth is smaller, younger people's contributions to tax-advantaged retirement savings accounts and other investment vehicles are nearly on par with those of older workers, the EBRI-IRI data shows, and as a result, their wealth accumulation between 2016 and 2020 was larger on a percentage basis.
And while younger investors' account growth is accelerating, baby boomers are set to start drawing down their 401(k) accounts and other sources of wealth to fund their retirement income needs — though it's likely their balances will also continue to grow for some time yet, albeit at a substantially lower slower rate.
Ultimately, as the data bears out, tomorrow's high-net-worth clients are today's tech-savvy, mass affluent millennial and Gen Z investors, and much of their wealth can be expected to be concentrated in workplace retirement plans.
As such, experts agree, even the biggest and best-established wealth management and advisory firms must pivot toward this client base to reach growth goals in the future.
Digging Into the Data
According to EBRI and the ICI, three primary factors affect account balances, and these are contributions by the participant and employer, investment returns, and withdrawal and loan activity.
Between 2016 and 2020, which is the latest year for which comprehensive data is available, the average 401(k) plan account balance for consistent participants rose each year. Overall, the increases reflect a compound annual average growth rate of 19.4% over the period, with the average account balance rising from $78,008 at year-end 2016 to $158,361 at year-end 2020.
The median 401(k) plan account balance for consistent participants increased at a compound annual average growth rate of 28.3% over the period, according to EBRI and the ICI, reaching $62,134 at year-end 2020.
As noted, younger 401(k) participants and those with smaller year-end 2016 balances experienced higher percent growth in account balances compared with older participants and those with larger year-end 2016 balances.
