As 401(k)s Crumble, Some Good News

Investors are furious about their 401(k)s. Account balances have shrunk. At Congressional hearings, experts complained that 401(k) costs are too high. Some witnesses called for substantial changes.

Should 401(k)s be abandoned altogether? Hardly. While nearly all plan participants lost something in the downturn last fall, the retirement system has proved to be resilient. Many employers have been taking steps that will strengthen plans in the future.

According to benefits consultant Hewitt Associates, the average 401(k) balance dropped from $79,000 in 2007 to $68,000 in November 2008, a 14% decline. In contrast, the S&P 500 lost 37.7% during the first 11 months of last year.

Mutual fund companies and employers helped limit the 401(k) damage by encouraging plan participants to stay the course, investing in bonds and other diversified holdings as the stock market tumbled. According to Hewitt, most plan participants now hold broad mixes of stocks and bonds.

The average account had 53.8% of assets in stocks in 2008, with the rest in fixed income. Conservative bond funds protected investors, who were fortunate that their allocation to equities had dropped in recent years, falling from 74.2% at the height of the bull market in 2000.

Part of the shift from equities can be traced to changes in the policies of employers. In the past, many gave company stock to 401(k) participants. The stock often came as matching contributions, and some plans required employees to keep their employers' shares. Companies figured that stock ownership motivated employees and helped to stabilize share prices.