New paper: The Impact of the Recent Financial Crisis on 401(k) Account Balances

The Employee Benefit Research Institute has released a new paper by Jack VanDerhei titled The Impact of the Recent Financial Crisis on 401(k) Account Balances.

During 2008, major U.S. equity indexes were sharply negative, with the S&P 500 Index losing 37.0 percent for the year, which translated into corresponding losses in 401(k) retirement plan assets. But how individual 401(k) participants are affected by the crisis is largely determined by their account balance, age, and job tenure. This paper estimates changes in average 401(k) balances from Jan. 1, 2008, to Jan. 20, 2009, using the EBRI/ICI 401(k) database of more than 21 million participants. Not surprisingly, how the recent financial market losses affect individual 401(k) account balances is strongly affected by the size of a participant's account balance. Those with low account balances relative to contributions experienced minimal investment losses that were typically more than made up by contributions: Those with less than $10,000 in account balances had an average growth of 40 percent during 2008, since contributions had a bigger impact than investment losses. However, those with more than $200,000 in account balances had an average loss of more than 25 percent. This analysis also calculates how long it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels, before the sharp stock market declines. Because future performance is unknown, this analysis provides a range of equity returns: At a 5 percent equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but approximately five years at the 90th percentile. If the equity rate of return is assumed to drop to zero for the next few years, this recovery time increases to approximately 2.5 years at the median and nine to 10 years at the 90th percentile.

Click here to read the whole paper.