Grim news about the stock market continues to give 401(k) participants another excuse to toss aside their monthly balance statements. Yet new research by the Employee Benefit Research Institute explains that participants' losses are also determined by their account balance, age and job tenure.
EBRI studied how a sharp stock market decline affected 401(k) account balances from Jan. 1, 2008, to Jan. 20, 2009, examining the accounts of more than 21 million participants.
Analysts determined that individuals with small account balances relative to contributions faced minimal investment losses, which were generally made up by contributions. For example, participants with less than $10,000 in account balances had an average growth of 40% in 2008, given that contributions had a bigger impact than investment losses. Participants with more than $200,000 in account balances, however, had an average loss of more than 25%.
The data also shows that 401(k) participants nearing retirement (ages 56-65) who have been employed for one to four years with their current employer had average changes during this period that varied between a positive 1%, compared to those with long tenure (more than 20 years) who experienced more than a 25% loss.
Researchers further explain how long it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels, before the stock market turned bearish.
"At a 5% 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," the report explains. "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."
