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How 401(k) investors can beat a bear market

By Hal M. Bundrick/

Company-sponsored retirement plans, such as 401(k)s, can be quite resilient in times of adversity. Despite seeing their account balances plummet an average of nearly 38 percent during the market crash of 2008, "consistent participants" saw their retirement savings grow at a compound average annual rate of 7 percent from year-end 2007 to year-end 2012. These stick-to-the-plan investors saw their account balances grow 67 percent higher than the average balance of all plan participants.

The key: Consistent participation -- resisting the urge to time the markets by jumping in and out of retirement plan savings. The study, conducted by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), says the combination of continued employer and worker contributions, along with investment returns -- even during trying times -- yields better financial results.

"This research provides a meaningful analysis of the potential for 401(k) participants to accumulate retirement assets because it examines how a consistent group of participants' 401(k) accounts change over time," said Sarah Holden, ICI's senior director of retirement and investor research and coauthor of the study. "The research highlights that contributing and investing in a 401(k) plan consistently results in higher average account balances than the average balance for all plan participants."

The study examined the accounts of about 7.5 million consistent participants among 24 million participant accounts in the EBRI/ICI 401(k) database.

On average, about three-fifths of plan participants' assets were invested in stocks, either through mutual funds (as part of the equity allocation of target-datefunds or balanced funds) or through company stock.

The popularity of target date funds continues to grow, with more consistent 401(k) plan participants holding the retirement goal allocation funds over the five-year period. At year-end 2007, 27.6 percent of consistent 401(k) plan participants held at least some target date fund assets in their 401(k) accounts. By the end of 2012, that share had risen to 32.1 percent.

"The data confirm the continuing important role of target date funds in 401(k) plans, revealing that a substantial core of consistent 401(k) participants who held at least some target date fund assets in their account before the financial crisis, still did so at year-end 2012," said Jack VanDerhei, EBRI research director and coauthor of the study. "At year-end 2012, nearly one-third of those holding any target date fund assets invested all of their 401(k) balances in target date funds."

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