Market Impact on 401(k) Accounts Differs Among Participants

Whether participants view 2008 as a good year for earnings on their 401(k) or a bad year can depend on account balance, age, or job tenure, according to a new Issue Brief from the Employee Benefit Research Institute (EBRI).

The Issue Brief estimates changes in average 401(k) balances from January 1, 2008, to January 20, 2009, using the EBRI/ICI 401(k) database of more than 21 million participants. It found that those individuals with low account balances relative to contributions experienced minimal investment losses that were typically more than made up by contributions. Those with less than $10,000 in account balances had an average growth of 40% during 2008, since contributions had a bigger impact than investment losses; however, those with more than $200,000 in account balances had an average loss of more than 25%.

Regarding age and job tenure, EBRI said 401(k) participants on the verge of retirement (ages 56 – 65) had average changes during the period between a 1% gain for short-tenure individuals (one to four years with the current employer) to more than a 25% loss for those with long tenure (with more than 20 years).

EBRI estimates that many participants near retirement had exceptionally high exposure to equities: Nearly one in four between ages 56 – 65 had more than 90% of their account balances in equities at year-end 2007, and more than two in five had more than 70% in equities. EBRI contends that if these participants had been invested in the average target-date fund at the end of 2007, 40% would have had at least a 20% decrease in their equity concentrations, and may have mitigated their losses.

Riding Out the Storm

EBRI’s analysis of the EBRI/ICI 401(k) database calculates how long it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels, using a range of equity returns. EBRI said that at a 5% equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but approximately five years at the 90th percentile. If the equity rate of return is assumed to drop to zero for the next few years, the recovery time increases to approximately 2.5 years at the median and nine to 10 years at the 90th percentile.

To show the benefit of staying the course and riding out the market crisis, EBRI analyzed a consistent sample of 2.2 million participants who had been with the same 401(k) plan sponsor for the seven years from 1999 through 2006. The average estimated growth rates for the period from January 1, 2000, through January 20, 2009, ranged from +29% for long-tenure older participants to more than +500% for short-tenure younger participants.

The February 2009 EBRI Issue Brief can be downloaded from