Weather the 401(k) Storm

By Michelle Singletary
Thursday, October 8, 2009

If you are wondering whether it's still worth the worry to invest in a 401(k) or similar workplace retirement plan, stop your hand-wringing.

It is.

Or at least it's worth it for the people who invest consistently, according to new research by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

Yes, it's been painfully apparent that 2008 was a crushing year for those of us who invest. The average value of consistent contributors' 401(k) retirement accounts fell 24.3 percent, according to the two groups.

But retirement plan data studied by the groups found that over a five-year period -- from 2003 to 2008 -- 401(k) participants saw their account balances increase at an average annual rate of 7.2 percent. Now, mind you, these are not the return-on-investment figures you're used to seeing -- in this case they include the workers' ongoing contributions and any employer matches as well as the investment gains and losses.

For all participants in the EBRI-ICI 401(k) database, the average account balance at the end of 2008 was $45,519, compared with $65,454 a year earlier. Again, that's a loss even after a year's worth of new money.

That kind of hit is enough to unnerve even a seasoned investor. So it's understandable that many people have been wondering lately whether it's foolish to invest the little bit of extra money they have now for the dream of having enough money to stop working at some point in their lives.

"Basically the engine of saving and investing that the 401(k) presents still works," said Sarah Holden, ICI senior director of retirement and investor research.

For participants in retirement plans who invest consistently, the average account balance rose to $86,513 at year-end 2008 from $61,106 at the end of 2003.

Holden said that even though retirement plan participants, like most investors, suffered in 2008 through one of the deepest bear markets in modern history, the growth in account balances -- while modest -- still shows that disciplined investing through workplace plans will help employees meet their retirement saving goals.

The EBRI-ICI study is worth noting because it is based on 24 million participants, including 6 million who have had 401(k) accounts with the same employer each year from 2003 through 2008. The 2008 data covered 48 percent of active 401(k) plan participants, 12 percent of plans and 47 percent of 401(k) plan assets. Information was gathered from participants in 401(k) plans of varying sizes and with a variety of investment options.

In their latest findings, EBRI and ICI found that the bulk of 401(k) assets continued to be invested in stocks. At year's end in 2008, 56 percent of 401(k) participants' assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. At least investors are getting the word that they shouldn't be overexposed to their own company's stock. The data found that the share of 401(k) accounts invested in company stock continued to shrink, falling by nearly one percentage point, to 9.7 percent, in 2008.

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