Same market, different outcome.
Same market, different outcome.
Although account balances for young 401(k) participants rose by a huge amount from Jan. 1, 2008, through the middle of this month, balances for workers nearing retirement fell, according to a recent report from the Employee Benefit Research Institute.
For 401(k) participants ages 26 to 35 who had accounts for four years or less, balances had risen 79.9% since 2007, while the market declined dramatically, EBRI found. But the balances of accounts held 20 to 29 years by workers ages 55 to 64 had dropped 8%.
Account balances rose less or declined more the longer the workers had accounts.
The results are due to the fact that older workers generally have higher balances than younger workers.
For the holders of small accounts, investment losses suffered since 2007 are likely to be offset by annual contributions. The effect of new contributions on large 401(k) balances is much smaller.
The findings mean that “young participants with small balances are much less likely to be paying attention to their 401(k) investment strategy and are much less likely to be making significant changes,” said Stewart Welch, managing member of The Welch Group LLC, which manages $340 million and helps clients manage money in their 401(k) plans. “The dollar drop [from the market downturn] does not feel as significant.”
But workers nearing retirement have watched equity account balances wither in the market free fall.
“They are much more likely to make big adjustments in their retirement investment strategy,” Mr. Welch said.
“They move from appropriate strategy to panic mode,” he said. “The most likely change they made was to reduce their equity allocation, and now in hindsight they're timing was impeccably wrong.”
