The last few months have undercut Theresa Dreike’s retirement savings at least 20%, but the 28-year-old Long Beach resident is still contributing $200 a month to her 401(k) account as she cuts back elsewhere in her life.
“It’s not like I need this money tomorrow, so it’s important to keep making the investment because I don’t know what’s going to be there for me when I actually retire,” she said. “For all I know, Social Security could be gone.”
Her situation is a familiar one to Americans nationwide after the recession and a tight clamp on lending devastated the stock market, especially in the last three months of 2008.
Millions of workers watched the value of their 401(k) retirement accounts plunge an average of 27% last year, the first drop in five years, but almost all are continuing to invest, according to a Fidelity Investments survey released Wednesday.
The average account balance fell to $50,200 last year, from $69,200 the year before, the survey found. In October, the Congressional Budget Office estimated that workers collectively had lost $2 trillion in retirement savings over the previous 15 months.
“This could not have happened at a worse time, with the whole baby boom population approaching retirement,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College.
“There’s no time for them for the market to bounce back. No reasonable amount of saving can make up for this loss,” Munnell said. “A powerful antidote would be telling them to work longer, but that’s hard to prescribe when you’re hearing about layoffs every day.”
Still, employees saved an average of $5,600 last year, up about $100 from the previous year, according to Fidelity, which is the administrator for 401(k) plans covering more than 11 million workers at 17,100 companies.
Other researchers have found similar trends. The Investment Company Institute found in a December survey of 22.5 million accounts that only 3% of employees stopped contributing to their plans. Some analysts said investors were hoping to take advantage of depressed stock prices that could rebound over the long term.
“Even though it’s impossible to predict the markets, history tells us that they recover eventually,” said Doug Fisher, Fidelity’s senior vice president of retirement policy development. “So the overwhelming benefits -- tax benefits, employer matching -- of the 401(k) really entice participants to keep contributing.”
Still, some experts questioned whether too many 401(k) investors were on autopilot.
Only 14% of plan participants altered their asset allocations last year, although 37% of those with accounts totaling more than $250,000 made changes.
Scott Leonard, chief investment officer at Los Angeles wealth management firm Trovena, said investors were misinterpreting the old-school “buy and hold” mantra.
Some clients, he said, “are thinking that they’re in this for the long haul and they might as well stay put and ride it through. And more people are saying that they don’t want to sell the stocks they’ve lost 40% on, until those stocks come back.”
But Leonard believes that many people should be thinking more conservatively about what to buy and hold, shifting more in favor of less-risky investments such as high-quality bonds that pay regular income.
Overall, many investors have focused on diversifying their assets in this decade. For example, fewer 401(k) investors hold only stocks in their accounts now compared with eight years ago. Just 16% of plan participants had 100% of assets in stocks at the end of last year, versus 37% in 2000, Fidelity said.
And the percentage of assets held in shares of workers’ own companies has been halved since 2000, to 10%.
The old days of conventional pensions that guaranteed monthly payments began to wear away as the workforce became more mobile in the 1980s. Companies increasingly shifted from those plans to 401(k)s, putting the burden of saving on workers and leaving retirement nest eggs in those accounts dependent on volatile markets.
Nearly 45% of households are at risk of running out of funds to maintain their living standards during retirement, according to a Center for Retirement Research index.
“The 401(k) system is being asked to do something it was never meant to do when it first became popular as a supplement, as play money,” Munnell said. “But now people are incorporating it into their financial planning, and when they get stuck -- which they will -- they use that money, and not for frivolous purposes, either.”
Still, Fidelity said just 1.8% of 401(k) investors asked for “hardship withdrawals” of funds last year, up slightly from 1.6% the previous year.
Fidelity also found that fewer than 1% of companies suspended or reduced their matching contributions to 401(k) plans last year.
But as corporate earnings dive in the recession, it may become more difficult for many firms to sustain those contributions. Any reduction in matching payments threatens to leave workers further behind in saving for retirement, and could force some to stay in the workforce longer than they had planned.
The percentage of people age 55 and older working full time was 30% in 2007, up from 22% in 1990, according to the Bureau of Labor Statistics.
“All these individuals who thought they were on the road to retirement are getting this nasty surprise,” said Jack L. VanDerhei, research director at the Employee Benefit Research Institute.
“It really brings into focus what we as a country need to be worried about,” he said, “because we have more individuals whose 401(k) plans are going to be the only thing supplementing their Social Security.”