4 Reasons Why an Average 401(k) Balance Doesn’t ‘Mean’ Much
In recent days, we’ve gotten updates on average savings rates and 401(k) balances, and while for the very most part the reports have been positive and “directionally accurate,” I’ve always taken such findings with a grain of salt. Not so many in the press.
Indeed, the press coverage of those reports is generally quite negative, in the “how can people possibly retire on those small amounts” vein.
Here are four things to keep in mind about those “average” 401(k) balances.
Your average 401(k) balance may not be based on very many plans or participants.
Some reports of plan design trends and average balances may do so based on a relatively small customer base, and/or homogenous plan size. That doesn’t mean the results are without value – but let’s face it, sample size matters in discerning trends. The average 401(k) balance in a universe of 50 plans is surely less instructive than one that is a hundred times that size. In all surveys, sample size matters. And when it comes to averages, it matters a lot.
Your average 401(k) balance includes some very different people and circumstances.
Your average “average 401(k) balance” includes a broad array of circumstances: participants who may (or may not) have a DB program, who are of all ages, who receive widely different levels of pay, who work for employers that provide varying levels of match, and who live (and may retire) in completely different parts of the country. You might even have situations where ex-participants (who have zero balances in this plan, but might have balances elsewhere) are included in the mix. Those are all factors with enormous impact in terms of evaluating retirement income adequacy, and yet, because it is an average of so many varied circumstances, the result is almost never “enough” to provide anything remotely resembling an adequate source of retirement income.
This conclusion that the average is woefully inadequate as a retirement income measure is the main point, and often the only point, that is reiterated somewhat incessantly (and generally without the caveats about its somewhat tortured compilation) in the press.
Your average 401(k) balance doesn’t include the same people.
People change jobs all the time, and with astonishingly persistent regularity. High-turnover plans and plans in high turnover industries, almost by definition, will pull down averages. And when workers change jobs, they “start over” in their new employer’s plan. The bottom line is that the average 401(k) balance from a year ago almost certainly doesn’t include exactly the same participants. So exactly how valid are trendlines in average balances among completely different individuals?
Mitigating the distortions inherent with these averages, the nonpartisan Employee Benefit Research Institute (EBRI) makes a point of reporting on consistent 401(k) savers, specifically in its most recent analysis, participants who were part of the EBRI/ICI 401(k) database throughout the five-year period of 2010 through 2015. Their report finds that this consistent group had median and average account balances that were much higher than the median and average account balances of the broader EBRI/ICI 401(k) database. How much higher? Nearly double at the average, and consistent participants had nearly four times the median account balance of the broader group.
Makes you wonder about all those conclusions based on the averages of inconsistent participants…
Your average 401(k) balance doesn’t include the same plans.
It’s not just workers who move around – 401(k) plans change providers all the time. And when they change providers, their plan and participant balances move as well. So, if in 2015 your plan (and 401(k) balances) were being recordkept by Provider A, those balances would be picked up in their report of average 401(k) balances. Now, you change to Provider B in 2016. All of a sudden your plan’s account balances “disappear” from Provider A’s reporting – and now show up in the numbers reported by Provider B. The net effect? Well, that could mean that the average balances as reported by Provider A decrease – not because of any change in savings behaviors, but simply because a plan (and its accompanying balances) have moved to a different provider’s base.
Yes, I’d say that your average 401(k) balance is, generally speaking, mathematically accurate – and, at least in terms of ascertaining the nation’s retirement readiness, nearly completely useless.
- Nevin E. Adams, JD
Indeed, the press coverage of those reports is generally quite negative, in the “how can people possibly retire on those small amounts” vein.
Here are four things to keep in mind about those “average” 401(k) balances.
Your average 401(k) balance may not be based on very many plans or participants.
Some reports of plan design trends and average balances may do so based on a relatively small customer base, and/or homogenous plan size. That doesn’t mean the results are without value – but let’s face it, sample size matters in discerning trends. The average 401(k) balance in a universe of 50 plans is surely less instructive than one that is a hundred times that size. In all surveys, sample size matters. And when it comes to averages, it matters a lot.
Your average 401(k) balance includes some very different people and circumstances.
Your average “average 401(k) balance” includes a broad array of circumstances: participants who may (or may not) have a DB program, who are of all ages, who receive widely different levels of pay, who work for employers that provide varying levels of match, and who live (and may retire) in completely different parts of the country. You might even have situations where ex-participants (who have zero balances in this plan, but might have balances elsewhere) are included in the mix. Those are all factors with enormous impact in terms of evaluating retirement income adequacy, and yet, because it is an average of so many varied circumstances, the result is almost never “enough” to provide anything remotely resembling an adequate source of retirement income.
This conclusion that the average is woefully inadequate as a retirement income measure is the main point, and often the only point, that is reiterated somewhat incessantly (and generally without the caveats about its somewhat tortured compilation) in the press.
Your average 401(k) balance doesn’t include the same people.
People change jobs all the time, and with astonishingly persistent regularity. High-turnover plans and plans in high turnover industries, almost by definition, will pull down averages. And when workers change jobs, they “start over” in their new employer’s plan. The bottom line is that the average 401(k) balance from a year ago almost certainly doesn’t include exactly the same participants. So exactly how valid are trendlines in average balances among completely different individuals?
Mitigating the distortions inherent with these averages, the nonpartisan Employee Benefit Research Institute (EBRI) makes a point of reporting on consistent 401(k) savers, specifically in its most recent analysis, participants who were part of the EBRI/ICI 401(k) database throughout the five-year period of 2010 through 2015. Their report finds that this consistent group had median and average account balances that were much higher than the median and average account balances of the broader EBRI/ICI 401(k) database. How much higher? Nearly double at the average, and consistent participants had nearly four times the median account balance of the broader group.
Makes you wonder about all those conclusions based on the averages of inconsistent participants…
Your average 401(k) balance doesn’t include the same plans.
It’s not just workers who move around – 401(k) plans change providers all the time. And when they change providers, their plan and participant balances move as well. So, if in 2015 your plan (and 401(k) balances) were being recordkept by Provider A, those balances would be picked up in their report of average 401(k) balances. Now, you change to Provider B in 2016. All of a sudden your plan’s account balances “disappear” from Provider A’s reporting – and now show up in the numbers reported by Provider B. The net effect? Well, that could mean that the average balances as reported by Provider A decrease – not because of any change in savings behaviors, but simply because a plan (and its accompanying balances) have moved to a different provider’s base.
Yes, I’d say that your average 401(k) balance is, generally speaking, mathematically accurate – and, at least in terms of ascertaining the nation’s retirement readiness, nearly completely useless.
- Nevin E. Adams, JD
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