Decade of 401(k) Losses Force Investors in Their 30s to Start Over Again

Decade of Losses Forces Investors in Their 30s to Start All Over
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http://www.bloomberg.com/apps/news?pid=20601213&sid=aSg6DWkihxUw&refer=home

By Charles Stein

April 15 (Bloomberg) -- Jason Woodward has barely broken even after dutifully pumping money into his 401(k) retirement account for about 10 years.

“I may be a little bit ahead, but not much,” said Woodward, 39, an employee of United Construction & Engineering Inc. in Torrington, Connecticut.

He’s better off than many 401(k) investors in their 30s who began saving a decade ago, according to data compiled by the Center for Retirement Research at Boston College. A median- income worker who put 9 percent of salary into an all-stock plan would have finished the decade ended March 31 with almost $10,000 less than he or she invested, a loss of 26 percent, the center found. With investments divided equally between stocks and bonds, the drop would have been 3.9 percent.

“There are days when it makes me extremely nervous,” said Woodward, whose wife, a state government worker, has her own retirement plan. “I am glad I am not retiring tomorrow.”

Investors in their 30s were too young to build their retirement accounts in the rising stock market of the 1980s and 1990s. Over those two decades, the Standard & Poor’s 500 Index climbed an average of 18 percent a year, including reinvested dividends, according to data compiled by Bloomberg. In the 2000s through March 31, the benchmark fell 4.7 percent annually.

‘High-Stakes Crapshoot’

U.S. Representative George Miller, a California Democrat, held a hearing in February to highlight what he described as the shortcomings of 401(k) plans. Miller, chairman of the House Education and Labor Committee, called the plans “little more than a high-stakes crapshoot.”

Alicia Munnell, director of the Boston College center, testified about the harm the decline in stock prices had done to account balances. The center’s data, which is awaiting publication, was an attempt to quantify the extent of the damage.

Boston College’s researchers made a series of assumptions to generate return data for their typical investor. They started with a 30-year-old worker who on March 31, 1999, earned $36,000, then the median salary for a head of household of that age covered under a 401(k) plan, according to the U.S. Bureau of Labor Statistics. The base salary was increased 3.3 percent a year, roughly in line with U.S. wage growth.

The researchers also assumed the investor consistently contributed 6 percent of salary to the plan and that the employer added the equivalent of 3 percent, or $38,406 over the decade. Retirement-plan fees weren’t factored into returns.

Two Scenarios

Under one scenario, the investor put all the money into the S&P 500 Total Return Index. In the other, half went into stocks and half into bonds, a blend of government and corporate bond indexes.

The stocks-only investor wound up with $28,552, or $9,854 less than he and his employer contributed. The worker with a mix of stocks and bonds had $36,920, or $1,486 less than the contribution total.

Over the 10-year period, stocks lost 26 percent of their value, while bonds rose 62 percent, according to the center’s analysis.

“With a start like that, it is going to take young people a long time to accumulate meaningful balances,” Boston College’s Munnell said.

At Representative Miller’s hearing in February, participants discussed potential changes to retirement law, including a proposal by Munnell to create a new tier of retirement savings on top of Social Security and 401(k) plans.

The average retirement account balance climbed to $82,300 at the end of 2006 from $50,200 at the end of 2000, according to data from Hewitt Associates LLC, a Lincolnshire, Illinois-based benefits-consulting firm. By the end of 2008, the average balance had dropped to $58,000.

Less in Stocks

U.S. 401(k) plans held $2.7 trillion as of Sept. 30, a decline of 10 percent from the end of 2007, according to the Investment Company Institute, a Washington-based mutual-fund industry group.

Hewitt also found that the portion of 401(k) assets in stocks fell to 53 percent in 2008 from 67 percent in 2007. The bulk of the decline, said Hewitt, came from investment losses rather than a shift by plan participants into more conservative asset classes. Hewitt regularly surveys 2.7 million 401(k) participants.

About 80 percent of employers with retirement-savings plans provide a match to employee contributions, according to the Profit-Sharing/401k Council of America, a Chicago-based trade association. The average match has been 3 percent of salary, the group said.

Employers Drop Match

The recession has caused employers such as Coca-Cola Bottling Co., FedEx Corp. and General Motors Corp. to stop making such payments.

Financial planners typically recommend that investors in their 20s and 30s put most of their money into equities on the theory that they can tolerate more risk and have more time to recover from downturns. At Vanguard Group, a mutual-fund firm based in Valley Forge, Pennsylvania, target-date retirement funds for investors under 42 all have a 90 percent weighting in stocks.

Kevin Sale, 32, still puts at least 80 percent of his retirement contributions into stocks, a practice he’s followed since starting his career in the late 1990s.

“I would have done as well holding cash,” said Sale, a financial planner in Bloomington, Minnesota. “You can’t deny the truth.”

Stuart Ritter, a certified financial planner with T. Rowe Price Group Inc., a Baltimore, Maryland-based mutual-fund firm, said younger investors need to keep their poor start in perspective.

Plenty of Time

“The game isn’t over,” said Ritter, noting that such investors won’t have to draw on their retirement funds for several decades. In the meantime, they can buy shares at today’s lower prices and watch them appreciate “for 30 more years,” he said.

Dan Greenhaus, a 31-year-old equity analyst for Miller Tabak & Co., a New York-based brokerage, said his generation of investors has experienced two bear markets -- one starting in 2000 and now the current recession -- and could start investing less aggressively.

“Some segment of the population is going to scale back exposure to stocks,” he said.

Several large 401(k) providers, including Fidelity Investments and Vanguard, said most investors have ridden out the latest bear market without cutting their weekly contributions or changing their asset allocation. In the fourth quarter of 2008, 6.1 percent of Fidelity’s retirement customers made changes in their portfolios, up from 5.8 percent in the fourth quarter of 2007, according to a Fidelity survey.

It’s no surprise that investors are sticking with their 401(k) plans, Boston College’s Munnell said.

“What is the alternative?” she asked. “Are you going to not save at all and rely on Social Security? People don’t really have a choice.”

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net.
Last Updated: April 15, 2009 00:01 EDT

 

Its funny reading articles like this. A few years ago, congress/president were ready to put Social Security in the market. Can you imagine if they would have privatized Social Security?

 

“The game isn’t over,” said Ritter, noting that such investors won’t have to draw on their retirement funds for several decades. In the meantime, they can buy shares at today’s lower prices and watch them appreciate “for 30 more years,” he said.


This assumption is correct if markets always go up over time. But what about Japan, which saw a sideways market for many years?

 

this is why dollar cost averaging seldom works well. it sounds like a brilliant idea when times are good but most people mentally cant follow through when the market is falling.

 

if you have a employer match for your 401k you'd be dumb to pass it up, no matter how bad the stock market fared.

if you don't have an employer match, then 401k's suck. they're too limited in their investment choices, plus your money is tied up for a long long time.

 

The Nikkei has fallen from just under 40,000 to 7,500 today, over a period of 20 YEARS.

Good luck to those who were in their 40s or 50s who had invested a large chunk of their retirement saving in the Nikkei in the hopes of retiring wealthy.

20 YEARS of the Nikkei dropping like a stone.

Why do they call it the lost decade? In fact, it was two decades of falling off a cliff, wealth destroying, plunging equities.

 

Yeah, but a lot of the employer match plans force you to lock up money in shitty funds. Just try and get your stuff into a money market fund with my employer -- damn near impossible. You have to sock it into idiot large cap funds.

 

401(k) is a scam, it may take awhile for people to realize this. The dow has no chance of repeating its 20th century performance. Long live Nikkei.