Vanguard: More Evidence of a 401(k) Comeback

Retirement account balances are climbing, especially among young people

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Most 401(k) participants now have a higher balance than they did in 2007. Among retirement savers that have continually utilized their 401(k) since September 2007, 60 percent now have the same size or a larger nest egg than they did at the stock market’s October 2007 peak, according to a new analysis of 1.7 million Vanguard retirement account participants. The median account balance increased by 7 percent over the two-year period.

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“The main reason for the recovery in 401(k) balances is ongoing contributions,” says Stephen Utkus, head of the Vanguard Center for Retirement Research. The increase in stock prices since March 2009 also played a smaller role, he says. Young retirement savers were more likely than their older counterparts to have recovered their market losses because new 401(k) contributions represent a larger fraction of their account balance. Some 87 percent of investors under age 25 and about 78 percent of those ages 25 to 34 have seen their account balance remain flat or rise since September 2007. Baby boomers have not been so fortunate. Only about half (53 percent) of 401(k) participants in their 50s and early 60s have recovered their account balance of two years ago.

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Target-date fund investors, who made up about 5 percent of all participants in the study, generally fared better than investors who selected their own asset allocation, Vanguard found. Among those who invested exclusively in target-date funds, 71 percent had their account balances return to or exceed the level of two years ago. Again, new contributions and 401(k) matches were primarily responsible for the uptick in account balances. “Most target-date investors have been contributing to their accounts for a limited period, so ongoing contributions benefited the smaller account balances more,” says Jean Young, a senior analyst at the Vanguard Center for Retirement Research. The diversification within target-date funds also played a role, she says.

Vanguard is the second major retirement account provider to release data that 401(k) account balances are beginning to rebound. Fidelity announced last month that the average 401(k) balance among its 11 million participants was $60,700 as of September 30, up from an average of $50,200 in 2008. But current account balances are still below the average of $69,200 Fidelity 401(k) participants had in 2007.

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Utkus, however, says that judging your current 401(k) account balance by comparing it to the size of your nest egg in 2007 is a mistake. “Asset values at a single point of time—whether a market peak in October 2007 or a market low in March 2009—should not be used to assess the overall success of an individual’s retirement program spanning decades of work and retirement,” he says. “Many participants feel they have lost two years of retirement wealth. While we empathize with their concern, it’s important to understand that a given high point in retirement wealth is not guaranteed.”