Most Vanguard 401(k) Participants Recovering Nicely

Sixty percent of investors in 401(k) plans administered by The Vanguard Group who maintained retirement balances over the last two years now have the same or higher balances than at the equity market’s October 2007 peak.

A Vanguard news release about its new study examining the impact of the economic downturn on 401(k) plan balances also said that the balances of 40% of continuous participants were lower, although most are less than 20% off their earlier peak. The study compared the balances in September 2007 with those in September 2009, noting the significant market dropoff in 2008 and early 2009.

Vanguard said 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 beat the level of two years ago. The median pure target-date investor’s account increased more than 80% during the period regardless of the stated retirement year of the fund.

According to the study announcement, researchers found that three factors led to an account balance recovery:

  • ongoing contributions to those accounts by participants and matching contributions by plan sponsors;
  • the balanced portfolio construction of participant accounts;
  • the sharp increase in stock prices from their March 2009 lows.

“The main reason for the recovery in 401(k) 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.”

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.

The Vanguard study is available here.