Average 401(k) account balance slumped 27% last year

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Wall Street’s vicious bear market slashed $19,000, or 27%, from the average 401(k) retirement savings account in 2008, according to data reported today by Fidelity Investments.

Boston-based Fidelity, the administrator for 401(k) plans covering more than 11 million workers at 17,100 companies, said the average plan balance tumbled to $50,200 last year from $69,200 in 2007.

The totals include contributions workers made during the year. So actual investment losses were worse than the 27% drop in the average balance. The average U.S. stock mutual fund slid 36% for the year; the average foreign stock fund plunged 44%.

Still, most people continued to add to their accounts in the fourth quarter, even as markets dived, Fidelity said.

The firm said that 96% of active plan participants in the third quarter also made contributions in the fourth quarter. Fidelity noted that there usually has been a ‘slight decline’ in contribution rates in the fourth quarter even in good market years, as some participants max out their plans.

Fidelity’s survey also found that just 6.1% of plan participants made exchanges among investment options in the fourth quarter, suggesting that there was no rush out of stock funds and into safer options.

I’ve written before that one possible reason few people made changes in their 401(k) plans in the fourth quarter was that the stock market’s collapse happened so quickly in October and November. The market then abruptly stabilized in December. Many financial advisors have told me their clients were simply frozen in place in the quarter, stunned by what transpired.

But there may be another reason most 401(k) investors didn’t sell stocks: Many people have gotten religion about diversification in recent years.

Just 16% of 401(k) participants had 100% of their savings in stocks at the end of last year, down from 20% in 2007 and 37% in 2000 (the peak of the dot-com bubble).

As unemployment surges, one risk is that more people will be forced to tap their 401(k) accounts to make ends meet. The percentage of plan participants who requested ‘hardship withdrawals’ edged up last year but still was relatively low, according to Fidelity: 1.8% versus 1.6% in 2007.

-- Tom Petruno