Jon Knutson, Published November 05 2009
401(k) plans making comebackHank Tkachuk received a nice surprise 10 days ago when he opened the updated statement for his employer-sponsored retirement savings account.
The Concordia College professor hadn’t looked at his account since spring.
“I was a little afraid of what I’d see,” he said, referring to the big plunge in stock and bond prices.
But he found that the markets’ recent rally had returned his balance almost back to where it was before the markets tanked.
Tkachuk isn’t alone.
Most investors with a 401(k) retirement plan or its virtual twin, the 403(b) that is offered by public schools and some tax-exempt organizations, have shown nice gains since spring.
Nationally, the average account balance for 401(k) participants ages 25 to 34 who have been with their employer for one to four years, rose 28.3 percent from March 9 to Oct. 27, according to the Employee Benefit Research Institute and Investment Company Institute, both based in Washington, D.C.
Keep in mind that the growth reflects new investments as well as gains on the existing balance.
The upturn comes after the nasty plunge in 401(k) account balances in 2008.
The average 401(k) account balance fell 30.5 percent from year-end 2007 to year-end 2008 for all participants in the Employee Benefit Research Institute/Investment Company Institute database.
A little background:
The 401(k) and 403(b) involve setting aside pretax income. The money is invested, with income taxes on the saved money and earnings deferred until withdrawal.
Pensions were once the dominant retirement plan for American workers.
Today, for every active worker who will be covered by a pension in retirement, there are two active workers participating in a 401(k) plan, the Employee Benefit Research Institute said.
Higher 401(k) account balances don’t mean participants can coast, said Judith Wade, senior financial planner with Baltimore-based T. Rowe Price, which offers mutual funds, investment and retirement planning services.
“Continue contributing. That’s the best thing you can do,” she said.
She also said 401(k) participants need a diversified investment strategy.
Target maturity funds – offered in many 401(k) plans – are worth considering, especially by people who don’t closely follow their investments, she said.
These invest-once-and-forget-about-it funds are designed around the year an investor expects to stop working.
For instance, a fund designated for someone planning to retire in roughly 2040 will be more aggressive than a fund meant for someone retiring in 2020.
The closer to retirement an investor comes, the more conservative the fund becomes. Each fund’s mix of assets – stocks, bonds and cash – is adjusted by its manager as time passes.
Target maturity funds “are a great concept. They’re an easy alternative” for people who don’t pay much attention to their 401(k), said Rob Mastel, who manages the retirement area for the trust division of Fargo-based State Bank & Trust.
He said he hasn’t seen evidence that area residents soured on 401(k) plans when stocks and bonds were struggling.
Nationally, the appeal of the 401(k) hasn’t dimmed, said David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America, which promotes the use of profit sharing and 401(k) plans.
He said he’s not aware of any companies that stopped offering the 401(k).
It’s true that some employers have stopped making matching 401(k) contributions, Wray said.
“So far, that hasn’t had a significant impact” on employee participation, he said.
Those employers say they’re suspending the contributions, rather than eliminating it, he said.
Employers that don’t offer a match will be at a disadvantage in hiring employees when the economy improves, he said.
In a difficult environment, 401(k) plans “have stood the test,” Wray said.
“It couldn’t have been more trying times, and they’ve come through with flying colors,” he said.
Readers can reach Forum reporter Jonathan Knutson at (701) 241-5530