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How to Double Your 401(k)

Last week Fidelity announced that participants in its 401(k)s had doubled their money over the past 10 years. Woo-hoo! And all this time you thought it had been a lost decade. Fidelity's press release read:
Fidelity Investments, the nation's No. 1 provider of workplace retirement savings plans, today released 401(k) data showing that pre-retiree participants who continuously held a 401(k) plan with Fidelity for the past 10 years more than doubled their account balances.
There are many astonishing things in this release. One, of course, is the sudden investing prowess of Fidelity 401(k) participants. In a release last year on its 401(k) participants' behavior, Fidelity noted that its ordinary participants tended to make the kinds of investment mistakes that ordinary folk always make: chasing last year's hot performer, pulling out at the bottom, saving too little. And yet now we learn that those same people are little Warren Buffetts, increasing the amount in their 401(k)s from 96,000 to $211,300 in a decade during which the stock market actually lost 4.2%. How'd they do it?

As Beth McHugh, vice-president of market insights at Fidelity explained (and as you probably already figured out), the key thing they did right was to keep saving. In other words, they and their employers poured in money faster than the bear market drained it away. "It proves that there's wisdom in sticking to old fashioned buy-an-hold, especially with regard to retirement," McHugh said.

What it doesn't prove, however, is that 401(k)s were a great success. A back-of the-envelope calculation based on data provided by Fidelity yields an internal rate of return of 0.5%. (All of that would be attributable to the bonds, stable value funds and the like in 401(k) portfolios.) When inflation is running 2.3% annually, as it did over the past decade, earning 0.5% is a nothing more than a slow way to get poor.

Fidelity's conclusion is that you should keep pumping money into your 401(k) through thick and thin. And that's true: By continuing to save through the crisis, you'd have collected the employer match, which would be foolish not to do, and you'd have saved on taxes. And yes, you do have to save, starting now, a good 10% to 15% of your pay. There is no alternative to that. Having $211,300 on the verge of retirement is better than having nothing.

But it's far less than those employees would have had they been covered by traditional pensions, or had their 401(k)s grown at even a modest rate of return. More to the point, it's not enough to afford 30 years of retirement. By shifting the costs of retirement almost entirely onto the shoulders of employees, our retirement system has not done employees any favors. Try as you might, you can't spin that away.

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