Good and bad news: 401(k) savers up 62% since crash

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(MoneyWatch) Fidelity Investments, the nation's largest provider of 401(k) accounts, announced earlier this month that the average 401(k) balance was up 62 percent in the three years ending March 30, 2012. On the surface, this is good news. Digging behind the numbers, however, shows those investors missed out on a large part of the market recovery.

Behind the numbers

Fidelity spokesman Mike Shamrell says about 18 percentage points of the 62 percent gain came from participant contributions. That translates to investors receiving a 44 percent increase due to investment gains. While a 44 percent gain isn't too shabby by itself, it seems investors missed out on a good portion of market gains over the period, which were as follows:

  • US stocks +91.7% (Fidelity Spartan Total Stock - FSTMX)
  • Int'l stocks +60.8% (Fidelity Spartan International Stock - FSIIX)
  • US Bonds +21.1% (Fidelity Spartan US Bond - FBIDX)

The 44 percent investment gain bested bonds but significantly lagged both US and international stocks. By my rough estimates, if investors had stuck to the 75 percent equity exposure they had before the market plunge (Q3 2007), the return should have been about 66 percent, using the low cost funds above. Of course, part of the shortfall is also due to higher cost fund options employees chose, either because they didn't have those options in their plan or chose those other funds on their own. Finally, cash lagged even bond returns.

Sticking to that allocation would have required rebalancing at a time when "cash was king," and few had the stomach to do so. Instead, Fidelity noted that conservative assets (includes stable value, fixed income, annuity and short-term/money market investment options) surged just when stocks went on a tear.

Conservative assets as a percentage of account totals:

  • Market high Q3 2007: 20%
  • Market low Q1 2009: 36%
  • Recent Q1 2012: 19%

Investors didn't panic either. Much of the increase in the 2009 conservative asset allocation was due to the sharp drop in equity values. In fact, they may have done better than accounts managed by advisors who timed the market poorly.

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Now for the really good news - investors are likely to capture more market gains in the future. That's because the use of target date lifecycle retirement funds seems to be on the increase. Fidelity reported that blended allocations (which include lifecycle funds and other target risk funds) increased from 14 percent of plan assets in Q3 2007 to 35 percent in the most recent quarter. According to Fidelity, a full 84 percent of those blended funds are in lifecycle funds, which will automatically rebalance as long as the investor stays put.  And the beauty of staying put is that it harnesses the power of inertia.


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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.