401k study can help us feel better

If you’ve stashed money in your 401k regularly over the last several years, a MarketWatch story can help you feel good about yourself.

A study of the performance of 401ks owned by 6 million consistent savers from 2003 through 2008 showed that:

… average account balances for these workers rose about 7% annually, even including the stock market crash in 2008 -- thanks in part to market gains in the years preceding the crash, but also thanks to workers' and employers' ongoing account contributions.

Now, let’s examine that more closely.

• The study (by the Employee Benefit Research Institute and the Investment Company Institute) is reporting on those accounts to which people and their employers contributed religiously over the five-year period (no gaps, no changing jobs).
• The averages mentioned here include large accounts but also those with tiny balances. Fed on a regular basis with employee and employer contributions, little accounts can grow no matter what the market does. (That fact reminds us of why these types of studies should always be read with a clear mind. The "average" or "median" might bear little relationship to your own experience.)
• On average, 41% of all the assets reviewed were in fixed-income securities (bonds and money market funds). On the other hand, 38% of the workers had more than 80% of their money in stocks.
• It’s no doubt that 2008 was rough. The accounts of the consistent savers lost an average of 28%, that year, better than the 37% drop in the S&P.
• Still, the story says, “The average account balance for these consistent savers rose to $86,513 by the end of 2008, up from $61,106 at the end of 2003 …. The median balance rose about 11% annually, to $43,700 at year-end 2008 from $25,507 at year-end 2003.”

Given all that, should we have reason to smile? Perhaps. Perhaps not. One commenter said about the premise, "That's like saying, 'There is a hole in the bottom of my bucket, but I am not losing any water, because I am pouring more in the top.'"

(The story also reminds us of a recent post at Bad Money Advice that spurred a debate about dollar cost averaging. Is it really the best investment approach or does it just make us feel better about investing? But we digress.)

More good and bad news from the report:

• A larger study of 24 million workers' accounts showed that 18% of workers had an outstanding loan from their 401k in 2008, not good but the same percentage as in the previous two years. (However, a Wall Street Journal story says the rate was 11% in 2006).
• Of that larger study group, 11 million could include company stock in their retirement plan, and 7% of those people had more than 80% of their retirement savings in that very same stock. People, stop doing that.

Related reading:

• How long until your nest egg recovers?
• Retirement? Good luck with that
• Workers step up raids on 401ks

Published Oct. 7, 2009