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I've got good news for you. You can peek out from under the covers now. You can even look at your 401(k) plan.
Despite the bruising bear market that persisted through 2002, 401(k) plans, on average, fared better than the overall market. While the broad equity market indices fell 22 percent in 2002, the average 401(k) balance fell just 7.9 percent for workers that maintained their account since year-end 1999, according to a study conducted by the Investment Company Institute and the Employee Benefit Research Institute. While results varied for different age groups, the common themes that contributed to the overall success were asset diversification and continued regular contributions to 401(k) plans despite falling prices, researchers found.
Employees in their 20s, just starting in the job market and in their retirement plans fared the best, with their average balance rising 4.3 percent in 2002. Their initial balances were lower and were more influenced by new contributions rather than the performance of previous investments.
Older workers didn't fare quite as well, as their balances tended to be greater than their contributions. Employees in their 30s have saw their average balance decline 6.2 percent, while those in their 40s saw a decline of just under 8 percent in their average 401(k) balance.
Hardest hit were workers in their 50s and 60s, who had large balances accumulated over time. Those in their 50s lost about 9 percent of their 401(k) balance, while those in their 60s lost 10 percent of their balance.
It also seems that those with 401(k) plans stuck to their investment strategies, making few, if any, changes in their asset mix. Of course, as the stock market fell, the average allocation to equity investments declined, but it was a function of the market and not of investors changing their asset allocation.
And true to form, the younger the 401(k) participant, the more they favored equities. The older the participant, the more likely they were to invest in fixed income assets. We also saw minimal borrowing from 401(k) plans, suggesting that those that were invested and continued to make regular contributions are now poised to benefit substantially from the current rally.
The news is very encouraging to me. I had feared that we would lose an entire generation of stock market investors, similar to the bear market of the early 1970s; investors burned in the 1973 bear market didn't come back to equities until the 1990s.
And this study underscores the wisdom of some of the investing tenets: think long term; use dollar-cost averaging; don't chase performance; don't try to time the market; and stick with the investment plan that best suits you.
It also highlights some of the pitfalls of 401(k) investing. A substantial portion of 401(k) plan participants still have a large exposure in their employer's stock, a strategy that can bite you (and severely diminish your portfolio) if your company's stock declines, a la Enron. (see Feature: Owing your employer).
Finally, the study highlights the need for those approaching or enjoying retirement to pay close attention to their portfolio. Retirement investing is different from the rest of one's wealth management strategy. While younger employees can ride out the market's ups and downs during their career while making regular contributions, retirees are looking for capital preservation and income. Some portion of a retirement portfolio must be in equities in order to achieve adequate returns. Withdrawing funds from a retirement account in a down or bear market leaves one short when the market does rebound.
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