More and more American families own mutual funds through 401k pension plans. Most of 401(k) plans invest in equities. So American financial markets continue to be fuelled by steady individual contributions, no matter how turbulent the indices are. That should be food for thought for Continental European lawmakers, still uncertain about how to reform national pension systems.
A record 50.6 m US households own mutual funds, 4.5% more than a year ago, according to a new research by ICI (Investment Company Institute, the mutual funds’ industry association). The increase means that nowadays about 49% of households own mutual funds and that 5m Americans became mutual fund shareholders for the first time in the last year. “In spite of the chaotic markets of the last 12 months, the reach of mutual funds continue to expand,” said Louis Harvey, president of fund research firm Dalbar.
If the first eight months of this year haven’t discouraged people, nothing will”.
No doubt the most loyal mutual fund owners are participants in 401(k) plans, the dominant pension plan in US, according to the last research by Ebri (Employee Benefits Research Institute, a private, nonprofit, nonpartisan research organisation based in Washington). In 1998 (latest data available from the Federal Reserve’s survey of Consumer Finances), nearly 57% of families with a worker and the head of the household under age 65 were covered by a pension plan. Among these covered families, about three-quarters were in a defined contribution (DC) type plan, such as a 401(k), which allows individual to invest in several different mutual funds and other financial assets.
Ebri found that among all 401(k) plan participants, 49.8% of the assets were held in an equity mutual fund, 17.7% in the company stocks, 11.4% in a guaranteed investment contract (Gic), 8.4% in balanced funds, 6.3% in money funds, 6.1% in bond funds and 0.3% in other stable value funds. Age looks to be very important to 401(k) plan participants: among those in their 20s, 75.7% of assets were held in an equity mutual fund and/or the company stocks. Among 401(k) plan participants in their 60s, assets in an equity mutual fund were still important, but at a lower level, 54.5%, while the investment in Gic was higher or 20.6% of assets.
The average account balance (net of loans) for all 401(k) participants was $47,004 at year-end 1998, which is 26% higher than two years before ($37,323 at year-end 1996). But these figures represent only accounts with current employers. If you include amounts with prior employers’ plans and other “personal account” plans – such as IRAs (Individual retirement accounts), the average total account balance for families with a plan in 1998 was more than $78,000. Ebri emphasises that “personal account” retirement plans have grown to account for nearly half of all the financial assets for American families with such a plan.
The trend towards the individual responsibility model in retirement plans is very clear, pushed by the emergence of the new economy: 78.6% of the working family heads covered by a pension plan in 1998 were in a DC plan, an increase of about 36% from the 57.8% level in 1992. But this trend hasn’t yet affected very much the public administration sector, where defined benefit plans are still very important and “only” 52.8% of the working family heads covered by a pension plan in 1998 were in a DC plan.
Regardless of industry, in 1988 among working family heads which were covered by a pension plan 21.3% were in a defined benefit plan exclusively, 60.7% in a DC plan exclusively and 17.9% in both a defined benefit and a DC plan. In all, pension coverage rates remained largely stable from 1992 to 1998: the decline in the agriculture, forestry and fisheries (where only 10.3% of the family heads were covered by a pension plan) and in the construction industry (down to 31.6% from 36.7%) was offset by increases in all other industries, especially in the finance, insurance and business and repair services industry, where the coverage rates in 1998 were up to 42.4% from 37.5% in 1992.
A major concern underlined by Ebri is whether the 401(k) individual responsibility model can survive a prolonged market downturn.
On the other hand, employers are struggling to understand if they should use new technology to provide employees not merely “education” or “advice” for their own investment decisions with 401(k) plans; and how this affects a plan sponsor’s fiduciary responsibility and potential liability for investment losses.

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