Why Your 401(k) Still Hasn't Recovered

Retirement account balances are still below their 2007 peaks.

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Investors haven't given up on their 401(k)'s. Retirement account balances have rebounded this year, but are still below their 2007 peaks. 401(k)'s and IRAs held $7.9 trillion in the first quarter of 2010, up 23 percent since a trough of $5.9 trillion in the first quarter of 2009. Still, retirement account assets remain 17 percent below their 2007 value of just over $8.6 trillion and currently hold about the same amount they held in 2006, according to Urban Institute calculations.

The stock market's wild ride is also reflected in individual account balances. The average 401(k) plan balance rose from $57,150 in 2008 to $70,970 in 2009, according to a Hewitt Associates study of nearly 3 million employees at 120 large companies. However, that's still 11 percent below the average 2007 account balance of $79,570. Here's some insight into why your 401(k) still hasn't fully recovered.

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Returns are up, but not high enough. Two-thirds (67 percent) of Americans say they haven't recovered losses from market lows a year ago, according to a recent Edward Jones and Opinion Research Corporation survey. Most of the retirement savers in the survey say it will take their investments several years to recuperate. While a significant recovery has occurred in many retirement accounts, most nest eggs have not yet reached their former size. The median Vanguard 401(k) balance grew by 33 percent in 2009, after a decline of 31 percent in 2008. Those returns reflect not only stock market improvements, but ongoing contributions by participants. "Returns were strongly positive but not enough to offset the losses they had," says Pamela Hess, Hewitt's director of retirement research. The current median Vanguard 401(k) balance, $23,140, is still below the $25,953 next egg that the median retirement saver had in 2006.

Failing to rebalance. Many retirement savers failed to buy low and sell high. As the stock market dropped, savers who didn't rebalance their portfolio ended up with a smaller portion of their 401(k) account invested in the stock market. When the market rebounded, these investors capitalized on the amount still in equities. "The average equity exposure was down so significantly that when the market rebounded, those people's returns weren't as good as they would have been if people rebalanced," says Hess.

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Not enough new contributions. Most workers continued to contribute to their 401(k) plan even as their investments sank. Only about 3 percent of Vanguard 401(k) participants stopped contributing in 2009. Continuing to save has helped boost 401(k) balances. The average Fidelity 401(k) account held $64,200 at the end of 2009, up 28 percent from 2008. New deposits from both workers and employers, which averaged 8.2 percent of employee pay, accounted for about three quarters of the growth in account balances. "People who stayed in the market and kept on contributing were the ones most likely to actually get close to and in some cases recover all of their losses," says Barbara Butrica, a senior research associate at the Urban Institute. "Younger people are most likely to have recovered because they had less to lose when the market crashed and then recovered their losses from their own contributions."

The median account balance in Vanguard 401(k) plans of those who saved continuously between September 2007 and December 2009 rose by 10 percent. The accounts of younger people with fewer years on the job have recovered faster because new contributions make up a bigger percentage of their total account balance. Older investors with longer job tenures generally lost the most money in 2008 and have had the most difficulty recovering.

Matchless 401(k)'s. Employer contributions to retirement accounts make up a significant portion of many people's next eggs. But many companies stopped contributing to retirement accounts last year. At least 267 employers reduced or suspended their 401(k) match in 2009, according to the Pension Rights Center. A 30-year-old worker earning $50,000 annually who goes without a 3 percent employer match for one year will have $16,000 less in retirement, according to calculations by Hewitt Associates that assume 7 percent annual investment returns and a 3 percent annual raise. Of course, workers who don't participate in their 401(k) also miss out on the match. Some 29 percent of employees didn't save enough to capture the full employer contribution in 2009, Hewitt found.