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Toll on 401(k) Savings Adds Years More of Toil

By Nancy Trejos
Washington Post Staff Writer
Thursday, January 29, 2009

Millions of Americans lost more than a quarter of their 401(k) retirement savings in 2008 because of the stock market's collapse, a setback that could force them to work longer or severely curtail their spending as they grow older.

In an analysis of their participants' accounts, Fidelity Investments, Vanguard and T. Rowe Price -- three of the nation's largest 401(k) plan providers -- also found that some employees were further eroding their savings by taking hardship withdrawals to pay for current financial needs.

Many Americans have seen their wealth evaporate with the drop in home values, the rise in the cost of living and the stagnation of wages. Now, as they tap into nest eggs to pay bills, they face leaner retirements as well. Particularly vulnerable are baby boomers who expected to retire in the next few years.

"With a hardship withdrawal, I'm going to eat my retirement for breakfast, lunch and dinner right now," said Teresa Ghilarducci, a professor of economic policy analysis at the New School for Social Research in New York. "That is worrisome. It shows that the outcome of this crisis is not only that the account balance is down, but that they're taking out part of their principal. . . . It means that it will take longer to retire."

The studies come as the 401(k) concept is under intense scrutiny from lawmakers, academics and economists. Congress originally intended 401(k)s to supplement workers' retirement savings. Increasingly, though, employers have abandoned professionally managed pensions, forcing workers into self-directed 401(k)s.

The stock market's dramatic collapse revealed the vulnerability of a system that requires workers to make investment decisions that professionals once made for them. To make matters worse, many cash-strapped employers have recently been suspending their contributions to employees' accounts.

"The financial collapse just drives home how fragile these plans are," said Alicia Munnell, director of Boston College's Center for Retirement Research.

In a study released yesterday, Fidelity Investments reported that the average 401(k) balance dropped 27 percent, to $50,200, last year from $69,200 in 2007. Fidelity has more than 11 million plan participants.

Vanguard, which has 3.5 million participants, reported the average account balance for 2008 fell 28.5 percent to $56,050 from $78,411 in 2007. T. Rowe Price's 1.7 million participants also had a 27 percent loss on average.

On a brighter note, fewer participants took loans against their 401(k) accounts. Nine percent of employees took out loans in 2008, down from 9.7 percent the year before, Fidelity reported. Vanguard and T. Rowe Price also reported drops in loans.

But all three providers had increases in hardship withdrawals, which require proof of dire financial need and come with a hefty tax bill. Vanguard, for instance, reported a 6.9 percent increase in hardship withdrawals from 2007 to 2008. That said, all three providers pointed out that the percentage of participants taking such a drastic step is low -- below 2 percent. And all three found that workers are, for the most part, continuing to contribute to their 401(k)s. In fact, Fidelity participants added an average of $5,600 in pre-tax earnings to their accounts in 2008, a slight increase from the year before.

"Employees are staying the course, and I think this is very good news because I think it really shows that employees recognize these savings dollars are a need to have, not a like to have," said Scott B. David, president of workplace investing for Fidelity.

Still, retirement experts warn that it could take a while for workers to recoup their losses. A $100,000 account that has declined by roughly a quarter can return to its original level in two years, if a worker contributes as much as he or she can to the 401(k) while the employer matches half of that amount and the market gains 8 percent each year, said Steve Utkus, director of Vanguard's Center for Retirement Research.

A hardship withdrawal could prolong that recovery, Ghilarducci said. If a worker takes out $20,000 from that account and the other circumstances are identical, the return to the $100,000 level could take 21 years. "This puts the 401(k) model to a test," she said.

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