The Forecast Is Sunny if You 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.

Forty-one percent of plan assets were in fixed-income securities, such as bond and money-market funds.

Jack VanDerhei, EBRI director of research, found that participants near retirement had exceptionally high exposure to equities. Nearly one in four between the ages of 56 and 65 had more than 90 percent of their account balances in equities at the end of 2007, and more than two in five had more than 70 percent.

You might be wondering: How long do I have to wait before I recover what I've lost?

No one can tell you for sure when your portfolio will see better returns, because you can't predict the performance of financial markets. But VanDerhei said his analysis shows that at a conservative 5 percent equity rate-of-return assumption, those with longer tenure with their current employer would need nearly two years at the median to recover.

Overall, what should you take away from this data?

And I'm not just asking for my financial health. It's important that you ask yourself this question when you read about these reports. If you don't, you'll continue to be scared or, even worse, jump out of the market altogether.

"If there is a takeaway for plan participants, it's that even having had the worst equity market since 1931, if people stayed consistent they still end up doing fairly well," VanDerhei said.

One thing this study does prove is that we still have to view retirement investing over the long haul. You can't look at one horrible investment year -- in this case 2008 -- and declare that investing is for chumps.

-- By mail: Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

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