401k Stats Current Research - Work in progress

Research notes...

This is where my theory of the "Rise of the Machines" and "Rise of the 401k Plans" comes into the mix.  Both in my view have contributed since 1980 to pushing the markets to an un-realistic level of value.  The evolution of accounting methodology has contributed by enabling these assets to be accounted for differently so that it captures and adjusts to the artificial environment created, 1. By the ability to move, manage and track large quantities of assets via electronic means and 2. Create an artificial floor and steady demand for assets via the advent and widespread adoption of the 401k plan.  The levels of which we are at right now are so lofty that we will see the floor drop out like a ride at Coney Island with many people stuck to the wall as the ride keeps spinning.  As the ride slows we will start to see institutions start dropping to the floor as the force of macro economic gravity takes over.

In 1978, Congress amended the Internal Revenue Code by adding section 401(k), whereby employees are not taxed on income they choose to receive as deferred compensation rather than direct compensation.[4] The law went into effect on January 1, 1980,[4] and by 1983 almost half of large firms were either offering a 401(k) plan or considering doing so.[4] By 1984 there were 17,303 companies offering 401(k) plans.[4] Also in 1984, Congress passed legislation requiring nondiscrimination testing, to make sure that the plans did not discriminate in favor of highly paid employees more than a certain allowable amount.[4] In 1998, Congress passed legislation that allowed employers to have all employees contribute a certain amount into a 401(k) plan unless the employee expressly elects not to contribute.[4]

In the mid-1980s, there were fewer than 8 million participants with less than $100 billion of assets in 401(k) plans.[5] By 2006, there were seventy-million participants with more than $3 trillion of assets in 401(k) plans.[5] There were 438,000 companies sponsoring 401(k) plans in 2003.[4]

Originally intended for executives, the section 401(k) plan proved popular with workers at all levels because it had higher yearly contribution limits than the Individual Retirement Account (IRA); it usually came with a company match, and in some ways provided greater flexibility than the IRA, often providing loans and, if applicable, offered the employer's stock as an investment choice. Several major corporations amended existing defined contribution plans immediately following the publication of IRS proposed regulations in 1981.

A primary reason for the explosion of 401(k) plans is that such plans are cheaper for employers to maintain than a defined benefit pension for every retired worker. With a 401(k) plan, instead of required pension contributions, the employer only has to pay plan administration and support costs if they elect not to match employee contributions or make profit sharing contributions. In addition, some or all of the plan administration costs can be passed on to plan participants. In years with strong profits employers can make matching or profit-sharing contributions, and reduce or eliminate them in poor years. Thus 401(k) plans create a predictable cost for employers, while the cost of defined benefit plans can vary unpredictably from year to year.

One danger of the 401(k) plan is if the contributions are not diversified, particularly if the company had strongly encouraged its workers to invest their plans in their employer itself. This practice violates primary investment guidelines about diversification. In the case of Enron, where the accounting scandal and bankruptcy caused the share price to collapse, there was no PBGC insurance and employees lost the money they invested in Enron stock. Congress inserted trust law fiduciary liability upon employers who did not prudently diversify plan assets to avoid the chance of large losses inside Section 404 of ERISA, but it is unclear whether such fiduciary liability applies to trustees of plans in which participants direct the investment of their own accounts. (Wikipedia) http://en.wikipedia.org/wiki/401(k)

The inception and adoption of the 401k plan has been the single best asset enhancer known to man.  In a way the proposal to change the social security system to private accounts could have kept the monster abated, by continuing to feed and lift the floor of all mainstream asset classes.  So with it's demise it was only a matter of short time before the pace of ascent in assets started to slow and trend down.

Pasted from

The case for the rise of the market since the 1980's has been primarily due to the invention and widespread adoption of the 401k plan.

"In the mid-1980s, there were fewer than 8 million participants with less than $100 billion of assets in 401(k) plans.[5] By 2006, there were seventy-million participants with more than $3 trillion of assets in 401(k) plans.[5] There were 438,000 companies sponsoring 401(k) plans in 2003.[4]"

In 2006-2007 we realized the peak in 401k plans asset's, at year-end 2008, all 401(k) plans held a total of $2.3 trillion in assets a 16% share of all retirement assets, with 49.8 million American workers being active 401(k) plan participants. Total of all retirement assets as of 2009 was approximately >$24 Trillion with Financial Services companies generating $189 Billion in fees on those assets or roughly 1% of the AUM.

Here are some immutable facts

People who lost money in their 401k Plans over the last two years not only were paper losses, but also represented real contributed wage money. If you were a $44,000 a year salary maker, contributing $4,000 a year to your plan, it is likely that from 2007 to 2009 you have lost at two years of hard currency contribution in addition to the gain that was never realized. At the very least 401k plan balances should have risen marginally due to the employees contributions, but they haven't. In addition since the employees contributions were continuing to buy assets that were in a lengthy and formidable decline they further compounded the problem. Surprisingly, if you are to believe Vanguard and yes why not they are credible, the majority of their 401k plan participants did not shift their asset allocations or funds during this period of extended volatility. While it is safe to say the majority have seen a modest recover of their balances in the run up of March - December 2009 It hasn't come close to recouping the value lost in the previous two years.

"Account balances

As a result of rising markets, median account balances for Vanguard participants grew by 33% in 2009, compared with a decline of 31% in 2008 (Figure 10, top panel, on page 10).8 However, account balances remain below 2006 levels. Despite the substantial drop in stock prices during the 2007–2009 period, not all participants experienced falling account balances (Figure 10, bottom panel, on page 10). In fact, the median account balance for continuous participants—those with an account balance in both September 2007 and December 2009—rose by 10%. About two-thirds of these continuous participants saw their balances rise or stay flat because of ongoing contributions and conservative asset allocations (for example, being invested exclusively or predominantly in fixed income holdings). In addition, another 25% of participants saw their account balances fall by between 1% and 20%—less than the decline of the stock market during this period."

Prolonged job loss and a distressed economy has contributed to reducing the number of employees contributing to their 401k plans, as well reduction in the amount still employed workers are contributing, and the number of hardship loans being taken has increased since 2007. Add to this former employees liquidating their 401k plans and it's easy to see how the 401k plan reduced approximately $700 Million from 2006 to year end 2008. This trend is likely to continue, as the jobs picture hasn't gotten any better, and that since the median age of 401k holders is 44 years old many of the large account balance holders are in their Sixties and are likely to be retiring soon and at the very least are limiting their exposure to equities


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