Participant Actions (or Lack Thereof) Helped Mitigate Downturn's Damage

New Vanguard research suggests that retirement plan participants, either as a result of conscious resolve or inertia, mitigated the recent economic downturn's damage to their retirement savings by reacting only marginally in terms of trading, contribution, and distribution behavior.

Resilience in Volatile Markets: 401(k) Participant Behavior September 2007-December 2009” found that most participants maintained their retirement programs through the economic downturn, while a small minority made changes that could undermine their long-term retirement security.

The data looked 3.2 million participants holding 3.4 million accounts in more than 2,000 plans recordkept by Vanguard between September 2007 and December 2009. Vanguard said the data show the median participant account balance grew by 33% in 2009, after a decline of 31% in 2008, reflecting the effects of both market improvements and ongoing contributions. Between September 2007 and December 2009, the median participant account balance grew by 10%, and six in 10 participants saw their account balances grow.      

Despite the ongoing market volatility, in 2009, only 13% of participants traded in their retirement accounts, compared with 16% in 2008. Also in 2009, 2.9% of active participants stopped making elective contributions to their plan, down slightly from 3.1% in 2008.     

However, 18% of participants had a loan outstanding at the end of 2009, compared with 16% in 2008. Hardship withdrawals rose 9% in 2009, although only about 2% of participants took one.

The number of participants terminating employment in 2009 who chose a cash distribution rather than preserving their retirement assets was unchanged from 2008, but slightly higher than in 2007.

Vanguard said the results also show the benefits of 401(k) plan design. “Counteracting the notion that 401(k) plans and participants are in dire straits, many of these investors were able to bounce back because they were able to make regular contributions through payroll deduction and to build a balanced portfolio from among a range of options,” said Stephen Utkus, head of the Vanguard Center for Retirement Research and co-author of the report, in a press release.