Business Development


Growth and Development of 401(k) Plans – A Retrospective

Section 401(k), added to the IRC by the Revenue Act of 1978, formally sanctioned the use of salary reduction as a source of tax-deferred retirement plan contributions. The law went into effect on January 1, 1980 and the first 401(k) plans became operational after the IRS issued regulations in late 1981 (though a few brave pioneer sponsors did jump the gun). Most of these initial plans were conversions of existing profit sharing or stock bonus plans. By 1984, the first year for which meaningful data exists, there were 17,300 plans and 7.5 million active participants with total assets of $92 billion.

A period of very rapid growth ensued. By 1987 the number of 401(k) plans had grown to 45,100 with 13.1 million active participants and $216 billion of assets. That year 401(k) represented only 8% of all corporate DC plans, but 38% of active participants and 41% of the assets. (As an aside, in 1987 there were 163,100 corporate DB plans with 28.4 million active participants; today, 25 years later, there are 44,800 plans with 16.8 million actives).

By 1992 there were 139,700 plans with $553 billion of assets. According to our historical research database, in 1992 the typical 401(k) plan offered 3 or 4 investment options, about 14% of all plans were daily valued (monthly was the most common). Insurance companies (37%) and banks (27%) controlled the lion’s share of 401(k) assets, though mutual companies were coming on strong (24%). Over half of all assets were invested in either Guaranteed Accounts/Stable Value (31%) or Company Stock (24%). Only 11% of assets were in diversified equity portfolios while balanced funds held 13% (risk-based asset allocation portfolios were very new and Target Date Funds were still a glimmer in someone’s fertile mind).

Market growth remained vibrant into the mid-2000s but over the past five years since 2007 has slowed dramatically. The rollout of automatic enrollment notwithstanding, growth in active participants has been anemic (less than 1% per year). Certainly, the severe economic downturn of 2008-2009 and tepid employment growth since are contributing factors but, more fundamentally, the 401(k) market may be considered mature after 30 years of existence; net new plan formation is quite limited. Only 7% of all employer firms with fewer than 50 employees sponsor a 401(k) plan.

The 401(k) Market Over 25 Years

(1987 – 2012)

  Plans Active Participants
1987 45,100 13.1 $216
1992 139,700 22.3 $553
1997 265,300 33.6 $1,264
2002 388,200 43.2 $1,573
2007 490,900 59.6 $2,982
2012 531,500 62.0 $3,585
10 Yr. CAGR (1987-1997) 19.4% 9.9% 19.3%
10 Yr. CAGR (1997-2007) 6.3% 5.9% 9.0%
5 Yr. CAGR (2007-2012) 1.6% 0.8% 3.8%

While that is the most dynamic sector of the economy and the expected source of much growth in employment in the years ahead, 401(k) plan penetration in that sector has moved little over recent years.

About our Findings

This data is taken from RRI’s Retirement Markets Overview – 2013, a compendium of retirement industry information published annually in April and from material in the RRI historical database.

About RRI

Retirement Research, Inc. is focused exclusively on the retirement services industry, offering profiles of leading providers and products in the small to mid-sized defined contribution market, a suite of interactive web-based competitive analysis tools and investment platforms, topical research reports and research-based consulting services.

For more information visit Contact Ron Bush at (860) 561-8878  or Kent Novell at (860) 519-5000







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