401(k) Accounts Are Rebounding Well

• Paul Katzeff
• On 5:53 pm EDT, Friday October 23, 2009

Things are looking up for 401(k) plan members. In large part it's because members helped themselves while the market turned to quicksand in 2008 and early this year.

In plans run by Vanguard Group, the median account balance on Sept. 30 was actually up 7% from two years earlier.

In September 2007 the market was close to its all-time high.

"In other words, the typical 401(k) participant at Vanguard now has higher 401(k) retirement wealth than before the market decline," wrote Vanguard's Stephen Utkus and Jean Young in a new study of 401(k) recovery.

The bounce back at Vanguard is largely due to plan members continuing to make contributions during the market downturn.

Of workers in Vanguard-run plans with accounts during the two years, 60% have balances equal to or higher than they were two years ago. Most lagging balances are owned by older workers, who tend to have bigger balances.

But even most balances that have not caught up yet are within 20% of their 2007 peaks. Most of the still-lagging balances also have heavier weightings in stock funds.

Plan members industrywide behaved similarly to Vanguard's.

Only 3.7% of members in all plans stopped contributing to 401(k) and other so-called defined contribution accounts in 2008, according to another new report, this one from the Investment Company Institute, a mutual fund trade group.

In the darkest days of the market mayhem, many plan members did take steps that would hurt them in the long run, assuming a return to historical norms.

Still, the market rally this year has restored many members' resolve to do the right thing.

Sticking to game plans. In the first half of 2009, the percentage of plan members who changed how they divvy new contributions between stock funds, bond funds and money market funds was 9.3%. That was an improvement over 2008's 12.4%, says the ICI.

As investors panicked during the market meltdown of 2008, many 401(k) members stampeded out of stock funds into bonds and cash.

Limited borrowing. In the first half of 2009, members largely resisted the temptation to steal from their own cookie jars. Loan activity increased slightly vs. 2008. But it was still in line with long-term trends.

Another positive development is under way, thanks to employers. More than 50% of companies that suspended matching contributions are planning to restore them in 2010, according to Byron Beebe, U.S. retirement market leader for Hewitt Associates, a human resources consulting firm.

Not all will restore matches to their prior levels. But many firms are considering adding features they did not offer before. Those include automatic enrollment, auto escalation of contributions, Roth 401(k) accounts and annuity options for withdrawals.

Beebe says his figures are preliminary estimates. Hewitt will have hard data in December.

Separately, members of plans industrywide have shown savviness. In a survey last May, JPMorgan found that 19% of companies cut or ended matches. But 68% of workers in those companies made no change in their own contributions. And 3% upped theirs.

Most firms that cut matches intended that to be a one-year action to conserve company cash, Beebe says.

Now that the year is coming to a close, those companies are sticking to their restoral timetable.

"Not having a match also makes it hard to recruit and retain talented people," Beebe said. "It's hard to get away with it longer than one year."

Restoring a match also boosts morale. "It you don't do it, it sends a tangible message that the company is not doing better now," Beebe said.

He also says plan members are putting more money into stock funds.

Leading Role For Stocks

Judith Ward, a senior financial planner for T. Rowe Price, says stocks play a key role because of their superior long-term performance.

"You can be retired for 30 years or so," she said. "You need some portion of equities in your portfolio to protect your purchasing power. If you have just bonds, you'll probably run out of money because things you buy increase in price."

The bounce back enjoyed by disciplined plan members shows the value of these key steps in any downturn, Ward says:

Keep contributing.

Stay with your game plan.

Continuing contributions can pay off. "Stock prices tended to fall farther than bond prices," she said. "But stocks will rise faster in a market rally. In the long run, plan members who kept contributing to their accounts will benefit from having bought more shares of stock and stock funds while prices were low."

Buzz up!