Participants in 401(k) and other defined contribution retirement plans who stayed the course after the stock market plunge of 2008-09 showed strong account balance growth during the subsequent market recovery. Those who stopped contributing to their accounts or shifted out of equities (stock funds) missed the rebound.
From the bottom of the equity markets on March 9, 2009, when the S&P 500 stock index hit a 12-year low, average account balances surged more than 55 percent to $71,600 a year later, illustrating how quickly market gains can happen after a period of volatility, according to data released by Fidelity Investments, a provider of workplace retirement savings plans.
The analysis is based on Fidelity's data from more than 17,000 corporate defined contribution plans and 11 million participants as of March 31, 2010.
“Over the long run, the tried-and-true strategies work best when it comes to saving for retirement,” said James M. MacDonald, president, workplace investing, at Fidelity. “Even through all of the volatility of the past couple of years, participants who continued to save in their 401(k) accounts now have a positive return from the start of the downturn in 2008.”
Stopping Contributions Cost Participants Dearly
While the vast majority of active participants stayed the course following the 2009 market bottom, those who stopped contributing to their workplace retirement accounts or decreased their investments in funds holding equities to zero paid a steep price:
• Of the 4.2 percent of participants who stopped contributing to their 401(k) plan between the start of the fourth quarter of 2008 and end of the first quarter 2009, fewer than half (40 percent) started to contribute again by the end of the first quarter 2010.
• A smaller 1.6 percent of participants dropped their equity allocation to zero between the start of the fourth quarter of 2008 and the end of first quarter 2009. Of this population, 60 percent kept their equity allocation at zero through the end of the first quarter of 2010, resulting in a 6.8 percent reduction in their account balance.
• Nearly four out of 10 participants (38 percent) who decreased their equity exposure had re-allocated a portion of their holdings back to equities by the end of the first quarter of 2010, indicating that they sold low (close to the market bottom) and then bought high (after a substantial market rebound), a highly counter-productive investment strategy.
Participants Using Target-Date Funds Fared Better
Adoption of target-date (or "lifecycle") funds, which shift their asset allocation toward a more conservative mix (fewer stocks, more bonds) as the designated target retirement date nears, continued to grow. Among plans that Fidelity administers:
• More than 49 percent of participants held all or part of their assets in a target-date fund by the first quarter of 2010, up from just 23 percent in 2005 and only 12 percent in 2000.
• Nearly one in five (19 percent) of participants held 100 percent of their assets in a target-date fund.
• Of those participants who did not allocate their assets fully into a target-date fund, 62 percent underperformed the age-based target-date fund available through their plan for the year ending March 31, 2010.
Stephen Miller is an online editor/manager for SHRM.
Related Articles:
Labor Department, SEC Issue Target-Date Fund Guidance, SHRM Online Benefits Discipline, May 2010
Employers Should Do More to Promote Retirement Savings, Employees Say, SHRM Online Benefits Discipline, April 2010
How to Mend Recession-Torn 401(k) Plans, HR Magazine, April 2010
Quick Links:
SHRM Online Benefits Discipline