In March 2009, the Dow Jones Industrial Average hit a low of 6,443 during the tumultuous two-year bear market, dragging many employees' retirement savings right down with it.

Less than a year later, a study suggests that the financial ship has somewhat righted course as far as 401(k) portfolios are concerned. And with the recovery comes valuable lessons for both companies and workers alike.

The study, conducted by Vanguard, found that at the end of 2009, 60% of 401(k) participants had balances equal to or greater than those levels realized at the peak of the market in October 2007.

Vanguard cited consistent contributions, better-balanced portfolios and the overall increase in stock prices as the three driving factors behind the stabilization. The Vanguard study looked at 1.7 million 401(k) profiles.

"One variable that led to the recovery was not having overly aggressive portfolios," says Stephen Utkus, head of the Vanguard Center for Retirement Research. "Regular contributions have also led to this recovery of asset value."

Inertia an advantage

But regular contributions don't necessarily translate to an active and engaged 401(k) participant. The market may have benefited from the inactions on the part of employees nationwide.

"I think the good news is inertia took over and most people did nothing," notes Jane Bryant Quinn, personal finance commentator and author of the new book, "Making the Most of Your Money Now." "During the rebound from April [2009] on, the inertia value of the 401(k) is very good."

Indeed, Utkus says that very few people actually reacted during the market turmoil and that people generally trade less during down markets. Previous Vanguard research found that just 3% of 401(k) participants stopped making contributions in 2008.

EBRI research

Separate research by the Employee Benefit Research Institute took the pulse of some 24 million retirement plans over a five-year period.

After four years of sustained growth from 2003 to 2007, EBRI found that the average 401(k) retirement account fell by more than 28% in 2008.

But investment diversification and balanced fund allocation contributed to an overall 11.4% annual growth rate in portfolios across the board during the five-year period, according to EBRI.

During uncertain times, participant activity and reaction can vary based on a number of factors.

When it comes to what employees may be doing well, Jack VanDerhei, director of research at EBRI, says that "it appears that 'most' 401(k) participants continued to contribute in the last two years at least as much as they had previously. It also appears that 'most' of them have not panicked and sold equities at the market bottom."

Lessons for younger workers

Demographics also play a role in the current fate of 401(k) portfolios and where various individuals stand. Many employees closing in on retirement had larger balances than their younger counterparts and thus had more to lose during the market downturn.

VanDerhei says that many participants near retirement age may have been too heavily weighted in equities at the end of 2007. This may be leading to delayed retirements for some employees looking to capitalize on recent gains in the market and stabilization of savings.

Younger workers, meanwhile, can take advantage of their longer horizon of savings.

"A virtue or upside of this collapse is that employees should realize they need to save more for retirement," Quinn says. "Younger people need to take a lesson from this."

Company stock still worrisome

And apparently the lessons need to be engrained more for the average American. Despite the widely reported 401(k) debacles at companies such as Enron and Global Crossing in the early part of this century, Quinn points to the recent collapse of Lehman Brothers and the virtual wiping out of some portfolios of a financially sophisticated workforce.

EBRI's research does indicate that the amount of company stock held in 401(k) portfolios decreased one percentage point in 2008 to an average of 9.7%. That continued a decline the firm has noticed since 1999.

In addition to the statistics and trends, employer communication and action can be beneficial to more financially secure retirement portfolios.

"There is incredible outreach that plan sponsors can do and emotional reassurance they can provide," Utkus says. "Encourage employees to keep contributing and maintain a balanced strategy. A good approach is to automatically enroll employees."

Once enrolled, Quinn recommends greater outreach and communication from employers so that workers can make the most out of their retirement savings.

"I think good employers should be providing rebalancing services. It's not an easy thing to figure out if employees are doing the rebalancing themselves," Quinn says.

Quinn says that companies should be considering various options for what workers can do with their savings upon leaving the company.

"Employers need to consider whether their 401(k) plans offer a protected atmosphere and flexible options of what to do when people leave the company," she notes. "Make it attractive to keep the money in the 401(k). Employers, especially large ones and some midsize, are getting more paternal about 401(k)s, as they should."

Kevin Sweeney, a former EBN associate editor, is a freelance writer based in Frederick, Md.

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