David Pitt

Most 401(k) investors who stayed the course have now recouped the losses, and more

By David Pitt
Associated Press / March 23, 2011

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Americans who were afraid to look at their 401(k) statements during the recession are finding good news inside the envelope now: Nine in 10 of the popular retirement plans are at least back to where they were in October 2007, the peak of the stock market. Since the bull market began in March 2009, stocks have almost doubled.

And many investors who kept their nerve and continued putting some of their paycheck into a 401(k) during the worst months are now ahead.

“I thought it would be more like six to eight years of pain, so I’m more than happy,’’ says Brett Hacker of Kansas City, Mo. The married father of two says most of his account is invested in a mutual fund that tracks the Standard & Poor’s 500 index, and the rest in his employer. His balance fell 53 percent in the downturn. He’s now 15 percent ahead of where he stood in 2007.

“By the time that the market started going down, I thought it was too far gone to jump out — and I just let it ride,’’ Hacker says. “I figured that I was in for a long haul.’’

Account balances didn’t recover entirely from the strength of the market. Those automatic paycheck deductions helped a lot.

On average, 401(k) participants put in about 8 percent of their pay from 2003 to 2006, says the business consulting firm Aon Hewitt. Contributions slipped during the recession, falling from an average of 7.7 percent in 2007 to the current average of 7.3 percent.

Advisers typically recommend setting aside 11 to 15 percent of your salary to enable you to live comfortably in retirement.

An Associated Press analysis of 401(k) data provided by the nonpartisan Employee Benefit Research Institute shows the youngest workers saw the most significant recovery.

If the stock market has declined, says Jack VanDerhei, the institute’s research director, it’s almost always true that workers with fewer years on the job are going to recover more quickly. That’s because they can make up losses more readily by continuing their payroll deductions. The money they’ve contributed since 2009 makes up a larger portion of their total account balance.

Those who bailed out of stocks near the bottom locked in their losses — and if they were afraid to reinvest, they lost out on the recovery. Hacker knows colleagues in that situation, and he’s thankful he stayed the course.

Most investors sought to recession-proof at least some of their money by pulling out of the stock market. Last year, they withdrew almost $97 billion from US stock funds and put more than $240 billion into bond funds, according to the Investment Company Institute.

One lesson of the past four years for retirement investors is the importance of sticking with a strategy instead of trying to anticipate the direction of the market, says Brian Wagenbach, at Charles Schwab in Minneapolis.

David Pitt writes for the Associated Press.