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Readers Select Top Fiduciary Stories of 2009: #5 401k Plans Recover Significantly by Year-End

February 11
17:51 2010

Although still far behind their 2007 peak, the market boomerang has allowed many 401k participants to recover most, though not quite all, of their losses. Nothing calms the litigious nerves like a soaring market, and maybe this is perhaps the best news of all for the typical 401k plan fiduciary.

351830_4146_color_slinky_stock_xchng_royalty_free_300In late 2009, Vanguard stated “60% of continuous participants (those with a balance in their plan over that two-year period) had the same or a higher account balance than they had at the stock market’s October 2007 peak.” (“Vanguard Study Finds That Market Rebound, Ongoing Contributions Spur Recovery in 401(k) Plan Balances,” BusinessWire, December 2, 2009). The study cites three primary factors for this recovery:

  1. Ongoing contributions to those accounts by participants and matching contributions by plan sponsors.
  2. The balanced portfolio construction of participant accounts. Most participants are not exclusively invested in stocks.
  3. The sharp increase in stock prices from their March 2009 lows.

Is success limited to Vanguard investors? Absolutely not. According to results published by the Employee Benefit Research Institute (EBRI), the average 401(k) balances of most age and tenure combinations were larger at the end of 2009 than at the end of 2007. The chart below, posted on the EBRI website, shows only  those with more than 20+ years experience have lower average balances, but then those employees are only within a few percentage points of break even.

Source: Employee Benefit Research Institute (Used by Permission)

Source: Employee Benefit Research Institute (Used by Permission)

Ironically, just as 401k plans sat on the cusp of full recovery, Time Magazine declared the popular retirement savings tool dead. (see “Time Magazine is Wrong!” FiduciaryNews.com, October 8, 2009) In the end, after all the concern that defined contribution plans might fail like so many of their defined benefit brethren, perhaps the old adage “everything regresses to the mean” might rise as the most appropriate comment here.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

1 Comment

  1. Ouida Vincent
    Ouida Vincent April 02, 22:52

    I read the Time article about retiring the 401K and tend to agree with it. I am a bit skeptical about counting ongoing contributions as part of the recovery of 401K plans, to me it is a bit like saying my portfolio that was worth a dollar increased 100% because I added another dollar to it. I am growing worried that demographic shifts at the back end of the baby boom will kill the 401K. My portfolio is still down 12.2% excluding on-going contributions.

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