Investors haven't given up on their 401k's.
Retirement account balances have rebounded this year but remain below their 2007 peaks. 401k's and individual retirement accounts held a combined $7.9 trillion in the first quarter, up 23% from the same period in 2009. Still, retirement account assets remained 17% below their 2007 value of $8.6 trillion, and are now about where they were in 2006, according to Urban Institute calculations.
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The stock market's wild ride is reflected in individual account balances. The average 401k plan balance rose from $57,150 in 2008 to $70,970 last year, according to a Hewitt Associates study of nearly 3 million employees at 120 large companies. That's still 11% below the average 2007 account balance of $79,570.
Here's some insight into why your 401k hasn't fully recovered:
Returns are up, just not high enough. Two-thirds (67%) of Americans say they haven't recovered from market lows, according to a recent Edward Jones and Opinion Research survey. Most retirement savers in the survey expect it will take several years for their portfolios to recuperate.
The median Vanguard 401k balance grew by 33% in 2009 after a decline of 31% in 2008. Those returns reflect both stock market improvements and 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 median Vanguard 401k balance, $23,140, is still below the $25,953 next egg that the median retirement saver had in 2006.
A failure to rebalance. Many retirement savers failed to buy low and sell high. As the stock market dropped, savers who didn't rebalance their portfolios ended up with a smaller portion of their 401k accounts invested in the stock market. When the market rebounded, these investors capitalized to the extent that they were 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.
New deposits from both workers and employers, which averaged 8.2% 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 (via) their own contributions."
The median account balance in Vanguard 401k plans of those who saved continuously between September 2007 and December 2009 rose by 10%. 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.
Continued: Penalized for early withdrawals
