Vanguard Study Finds Recovery in 401k Plan Balances
VALLEY FORGE, PA, December 2, 2009 -- The typical 401k participant now has greater 401k retirement wealth than before the severe market downturn, according to a new Vanguard report, Recovery in 401k Balances. Vanguard's research also indicates that investors holding solely target-date funds had even more positive outcomes relative to other participants.
The study looked at Vanguard participant balances between September 2007 and September 2009, a period during which the market peaked in October 2007 and declined dramatically in 2008 and early 2009. At Vanguard as of September 2009, 60% of continuous participants (those with a balance in their plan over that two-year period) had the same or a higher account balance than they had at the stock market's October 2007 peak. The balances of 40% of continuous participants were lower, although most of them had balances that are less than 20% below their earlier peak value.
Three factors led to a meaningful improvement in the retirement holdings of Vanguard 401k and other defined contribution plan participants:
- Ongoing contributions to those accounts by participants and matching contributions by plan sponsors.
- The balanced portfolio construction of participant accounts. Most participants are not exclusively invested in stocks.
- The sharp increase in stock prices from their March 2009 lows.
"The main reason for the recovery in 401k balances is ongoing contributions. Both investment returns and contributions jointly determine retirement savings," said Stephen P. Utkus, head of the Vanguard Center for Retirement Research. "Growth in one of those factors can offset losses in another over a given period. Our evidence suggests that ongoing contributions plus improvement over time in the capital markets may restore many more of these individuals to their pre-October 2007 wealth levels, perhaps more rapidly than previously anticipated."
Nearly 3 in 4 Target-Date Investors Experience Bounce Back
The study also found that 71% of pure Vanguard target-date fund investors (those investing their entire plan account in a target-date fund) saw their account balances return to or exceed the level of two years ago. The median pure target-date investor's account increased more than 80% during the period. These positive outcomes occurred regardless of the stated retirement year of the fund.
"Pure target-date fund investors fared better throughout this period than many other investors for two primary reasons. First, most target-date investors have been contributing to their accounts for a limited period, so ongoing contributions benefited the smaller account balances more. Second, with the diversification inherent in their target fund portfolios, target-date investors do not have all of their savings invested in equities," said Jean Young, senior analyst with the Vanguard Center for Retirement Research. "The target-date fund approach to retirement investing is designed primarily for people who desire simplicity, need help diversifying, or suffer from inertia in investment decision-making. This type of portfolio may be a better investment program than a majority of participants can, or are willing to, construct on their own."
Retirement Balances: Perception vs. Reality
Mr. Utkus said that many watchers of the U.S. retirement system have fastened their perceptions of 401k risk on the misleading measure of losses incurred after the market peak of October 2007. "Our view is that anchoring values at the market's high-water mark is a behavioral decision-making error," he said. "Asset values at a single point of time—whether a market peak in October 2007 or a market low in March 2009—should not be used to assess the overall success of an individual's retirement program spanning decades of work and retirement. In fairness, many participants feel they have lost two years of retirement wealth. While we empathize with their concern, it's important to understand that a given high point in retirement wealth is not guaranteed—it is subject to some level of risk."
Researchers looked at 1.7 million participant accounts in defined contribution plans at Vanguard between September 30, 2007, and September 30, 2009. Pure target-date fund investors represented 5% of the 1.7 million account sample.
About Vanguard
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world's largest investment management companies and a leading provider of company-sponsored retirement plan services. Vanguard manages more than $1.3 trillion in U.S. mutual fund assets, including nearly $490 billion in retirement assets. Vanguard offers more than 160 funds to U.S. investors and more than 50 additional funds in non-U.S. markets.
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