401(k) can bring steady gains in roiling market

The Baltimore Sun

If your employer offers a 401(k) plan, sign in. Then stay in and keep putting money away for your retirement in well-diversified investments.

This message from two studies on 401(k) plans seems particularly relevant given the turmoil in the financial markets.

"Most workers who have continued to save and invest in their 401(k) retirement plans over the past several years have done well, despite ups and downs in the stock market," said an August study by the Employee Benefit Research Institute and the Investment Company Institute.

The EBRI-ICI database, the largest in the country, covers about 20 million workers, or 40 percent of all 401(k) plan participants. Among them, the study focused on "consistent participants," about 3 million workers with 401(k) accounts with the same employer from 1999 through 2006.

For these workers, the average 401(k) account balance grew from $67,760 at year-end 1999 to $121,202 at year-end 2006, an annual compounded growth of 8.7 percent, despite the vicious 2000-2002 bear market.

Averages are higher for younger workers. Among those in their 20s, the average balance had an annual growth rate of 40.9 percent. (Because younger workers tend to start with small accounts, new contributions have a larger effect on their balances.)

For example: If you start the year with $10,000 and add $3,000, even if your investments lose $1,000 you end up with $12,000, a 20 percent increase.

To me, that's a powerful argument for dollar-cost averaging, or investing the same amount regularly in well-diversified funds. When markets decline, the same number of dollars buys more shares.

"Discipline pays off," said Jack VanDerhei, a professor at Temple University, an EBRI fellow and study co-author. "Ongoing contributions and diversification tend to mitigate the impact of a bear market."

Regarding diversification, the study found that 401(k) participants with two years or less on the job are increasingly investing their 401(k) contributions in diversified balanced funds that hold stocks and bonds.

Still, nearly 15 percent of the 20 million participants in the 401(k) database and almost 18 percent of those in their 20s did not have any money in equities. Stocks, while volatile, have provided higher returns historically and are a key component of a diversified portfolio, particularly for younger workers with time to ride out downturns.

"The message still needs to get out" about diversification, said Sarah Holden, a study co-author and senior director of retirement and investor research at the ICI, the trade group for the investment company industry.

A separate study by Fidelity Investments found that workers in 401(k) plans with automatic features participate in greater numbers and have better-diversified portfolios.

In these automatic plans, employees are enrolled unless they opt out, and their contributions typically are directed to diversified funds unless they choose otherwise. By the end of 2006, about 200,000 of more than 10 million participants in Fidelity-administered plans were enrolled in automatic plans.

"This 200,000 is a small fraction of the total, but automatic plans are fulfilling their promise," said Fidelity executive Jeffrey Carney. "Don't stop believing," said Mari Adam, a certified financial planner in Boca Raton, Fla. "Don't stop periodic contributions to your 401(k) and other savings accounts. Dollar-cost averaging is one of the best tools to tame market volatility and profit from market dips."


Humberto Cruz writes for Tribune Media Services.

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