In generations past, workers toiled away for hours each day hoping to survive long enough to retire. Back then, retirement came not from any individual accomplishment, but from a shared pool far from the reach of the individual worker. While the promise 
of a never-ending stream of annuitized payments dazzled the average employee, companies soon realized the growing liabilities of pension plans would eventually place them at financial risk. The corporate stagnation of the seventies dulled the imaginative senses of all, and, like lemmings, wage earners and their business sponsors headed towards the inevitable collectivist cliff.
Then a new morning dawned. The rugged individualist rose ascendant. The iconic statue of “to each according to their needs” fell to the triumphant “to each according to their talents.” No more must one risk riding the mutual bus of mediocrity. Now, each soul could choose its own course. If someone preferred safety, that was their decision. If another desired an aggressive strategy, that was OK, too.
Such was the glory and the promise of the 401k. No longer would the hired help yield to the company line when it came to his retirement. Now he could seize control of his own destiny by adjusting his contributions as well as through managing his own personal investments. In the era of the entrepreneur, could there have been a more perfect retirement plan?
Somehow we took a wrong turn on the road to capitalist Nirvana and folks started asking questions – questions we thought we definitively answered once and for all a mere handful of Presidential administrations ago. Like a resurrected virus, doubts of the sanctity of personal rights and responsibility infected first the think tank wonks, then the media pundits and finally the public policy makers. Even the multitudes, long grateful for the freedom endowed by the 401k, began to wonder if it might be better to throw in the towel of self-determination and sell their collective retirement souls for a Faustian promise.
But perhaps the news of the death of the 401k has been greatly exaggerated. According to two recent studies, the average 401k plan has been able to do what public pension plans and university endowments have not. Last month, Fidelity reported the average account balance of its nearly 17,000 plan sponsors and 11 million 401k participants not only recouped all losses since the 2007 market peak but ended 2010 at a 10-year high. Likewise, Vanguard released a study showing its average 401k participant account is at the highest levels since it began reporting in 1999. Meanwhile, the headlines tell us public employee pension plans have yet to make up for the losses from 2007-2009.
The 401k plan appears to be working as advertised once again. One may attribute all the hysteria over its apparent demise to the “Snapshot-in-Time” anomaly. Based on the behavioral concept of “recency,” this phenomenon generally causes the individual to overweight recent events. Specifically, when applied to investment performance, it can yield a skewed view of results. This aberration is more pronounced when the recent period experiences an extreme result (called an “outlier” by statisticians).
Though neither study can account for the impact of high unemployment, both show that roughly 70% of terminated workers either rollover their accounts into personal IRAs or keep them in their former employer’s 401k plan. It appears the recession did not have much an impact on the percentage of employees who cash out after leaving their job. This number has stayed around 30% since before the recession.
Vanguard concludes, “the resilience of participants underscores an important benefit of DC plans. Participants by and large take a long-term approach to investing.” James M. MacDonald, president, Workplace Investing, Fidelity Investments says of the 401k, “Despite the myths out there, this savings vehicle is, in fact, helping millions of Americans of all income levels save for their futures.”
Perhaps spring is the season of hope.
Chris, though your article doesn’t really get into this, the question you pose is simply answered; while the markets have rebounded, and have done much to lift the “average” 401(k) balance (though I maintain that that is a nonsensical metric), the big/real reason for the rebound is two (more) years of participant and employer contributions. As always, the solution to a savings “problem” is savings, not investing.
It is misleading, at best, to intimate that the numbers reported by Vanguard and Fidelity in terms of account balance gains (which include new monies AND returns) can be reasonably compared to the return-only figures of the state pensions, endowments, and S&P 500.
That said, a solid recovery doesn’t necessarily make for a satisfying retirement. It’s not at all clear that getting 401(k) balances back to a 2007 level (or whatever) is “enough.”