'Staying the Course' Rewards 401(k) Investors

Investors who pulled out of the market in 2008-09 saw 2% growth; those who maintained their investment strategy experienced 50% growth

By Stephen Miller, CEBS Sep 12, 2011

Even during the most volatile stock market activity, investors who maintain a diversified asset allocation strategy and do not pull out of equities (stock and stock funds), or make sudden contribution reductions, are rewarded when the equity markets rebound, according to an analysis by Fidelity Investments, a provider of workplace retirement savings plans.

“The events of the past several weeks have forced many investors to evaluate their investment strategies,” said James M. MacDonald, president of workplace investing at Fidelity. “Our analysis reinforces that during extreme market swings, it’s essential for investors not to overreact and remember that investing for retirement requires a long-term view, regardless of their investment horizons.”

To understand the impact of making 401(k) or other investment decisions based on market volatility, such as moving assets out of equities or stopping contributions, Fidelity analyzed participant actions during the market decline of 2008-09 through the second quarter of 2011. The results reinforced the value of a long-term investment approach.

For participants who changed their equity allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009, the lowest months of the market downturn, and maintained this allocation through June 30, 2011, the cost to their account balance was significant. These participants experienced an average increase in account balance of only 2 percent through June 30, 2011.

Participants who dropped to zero percent equity but then returned to some level of equity allocation after that market decline saw an average account balance increase of 25 percent, a sharp contrast to those who stayed with an asset allocation strategy inclusive of equities. These participants realized an average account balance increase of 50 percent during the same period.

In addition, Fidelity examined participants who stopped contributing to their 401(k)s during the same market decline of 2008-09. These participants experienced an average increase in their account balances of 26 percent through the end of the second quarter of 2011, compared to 64 percent for participants who continued making regular contributions.

Positive Savings Trends

Analysis of second-quarter 2011 data reinforced how many participants understood the importance of ongoing contributions and proper asset allocation.

The average annual participant 401(k) contribution in Fidelity-managed plans was $5,790 at the end of the second quarter of 2011, up 11 percent from the same quarter five years prior. More participants increased their contribution rates than decreased them (6.1 percent vs. 2.7 percent respectively), a positive trend for nine consecutive quarters. Additionally, the Fidelity average 401(k) balance of $72,700 was up 19 percent over five years.

Embrace of Target-Date Funds

Participants and plan sponsors have continued to embrace diversified portfolios via target-date retirement funds. At the end of the second quarter of 2011, 98 percent of Fidelity plan sponsors offered a target-date fund option. Among these plan sponsors, 72 percent defaulted participants into the target-date option, up from only 8 percent five years prior.

Among plan participants, more than half (52 percent) used a target-date option, with 46 percent of these participants—one quarter overall—investing 100 percent of their 401(k) assets into the option.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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