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Why Median > Average When it Comes to Retirement Plan Account Balances

In a recent article by Barry Ritholtz, he mentions a concept that should be drilled into every retirement plan sponsor’s head when they review their recordkeeper statistics as to the success of their retirement plan:  median is more significant than average.

In the retirement plan’s “dashboard,” “report card,” or whatever the recordkeeper is calling the plan review, the average participant account balance size is often touted as a measure of the plan’s success. The problem is that while there is nothing wrong with benchmarking average account balances relative to peers, in a vacuum, the average account balance statistic is a worthless number for most. The reason for this, as Ritholtz points out, is that it is often heavily biased by a small concentration of mega-sized account balances at the top of the distribution.

Here is a simple math example to illustrate the point:  Company X sponsors a retirement plan with ten participants, two of whom are the CFO and the CEO, each with an account balance of $2 Million. The other eight employees have account balances of zero. The average account balance of this plan would be $200,000 - which might lead a plan sponsor to think that its retirement plan is chugging along just fine, when, in fact, hardly anyone has any retirement savings!

A far better figure to use to determine the health of a plan is the median, which would be the middle number in the distribution of account balances. In the aforementioned example, this statistic would be zero, and would certainly signal to the plan sponsor that there is a retirement plan problem! The reason why some recordkeepers don’t use the median in touting their retirement plan results? In most cases, it does not make them look very good. Using the data from the recordkeeper in Ritholtz’s article, the average account balance was a healthy $103,866. Sounds good, huh? However, the median account balance for that same recordkeeper was a mere $26,331!

Now, the median in this example, which is less than what most people pay for a new car, is not as awful as it might appear, since many of the smaller accounts belong to younger employees who have not yet benefitted from the compounding returns that can make a retirement plan balance, well, large. That is why it is important for plan sponsors to review not only the median balance but also the median balance for each age cohort within the retirement plan. A $26,000 average account balance for the 20-29 age group is far less alarming than, say, a $26,000 average balance for the 40-49 age group.

So the next time your recordkeeper hands you a review touting the plan’s average account balance, ask to see the real figure—the median—and ask to see it broken down by age and service. You’ll be glad you did! Do you know of any other retirement plan “success” statistics that are not accurate measures of success at all? If so, I would love to hear from you! Hit me up on Twitter or at  

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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