401(k) account owners who maintained their equity allocation and continued to save during the market decline of 2008 and 2009 now have much larger account balances than investors who stopped saving or pulled their money out of the stock market, according to a new Fidelity Investments study.
Investors who left their equity allocation intact during and after the worst of the stock market plunge and kept saving as usual in their 401(k) plan saw their account balance grow by an average of 50 percent between Sept. 30, 2008 through June 30, 2011, according to Fidelity’s analysis of nearly 20,500 401(k) plans with more than 11.6 million participants. Retirement savers who withdrew all of their money from the stock market between Oct. 1, 2008 and Mar. 31, 2009, the lowest months of the market downturn, and never moved any money back into equities have experienced an average increase in account balance of only 2 percent. Even a temporary exit from the stock market was enough to hurt account balance growth. Participants who exited the stock market completely, but then returned to some level of equity allocation after the market decline, saw an average account balance increase of 25 percent.
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Workers who stopped saving for retirement during the 2008 and 2009 market decline also have lower account balances today. Participants who gave up contributing to their 401(k)s during the downturn experienced an average increase in their account balance of 26 percent by June 30, 2011. In contrast, retirement savers who continued making regular contributions to their 401(k) have seen their account balances grow by an average of 64 percent since Sept. 30, 2008.
Investors are understandably anxious about continuing to grow and protect their retirement savings despite the current market volatility. Fidelity says its calls from concerned customers have spiked 50 percent above normal levels in the past two weeks. The company’s typical response is to advise investors to stay the course. “During extreme market swings, it’s essential for investors not to overreact and remember that investing for retirement requires a long-term view, regardless of their investment horizons,” says James MacDonald, president of workplace investing at Fidelity Investments.
Short-term fluctuations in account balance are common in 401(k) plans. The average Fidelity 401(k) balance was $72,700 at the end of the second quarter, down from $74,900 in the first quarter 2011, but up from $71,500 at the end of 2010. The average savings rate is 8.2 percent of pay, and 61 percent of active 401(k) participants save 6 percent or more of their salary annually. More participants increased their savings rate (6.1 percent) than cut back on contributions (2.7 percent) in the second quarter.