401(k)s lost less than expected, but most accounts were small

Dollars & Sense

October 05, 2003|By Jeff Brown | Jeff Brown,KNIGHT RIDDER/TRIBUNE

Here's one of those good news-bad news stories.

The good news: Investors with 401(k) accounts lost much less than you'd expect last year, given the plunge in stock prices.

The bad news: Many did relatively well for the wrong reasons.

A study by the Investment Company Institute, the mutual fund trade group, and the Employee Benefit Research Institute, a nonprofit research outfit, found that the average 401(k) account lost only 7.9 percent of its value in 2002, even though the average stock fell by 22 percent. The study looked at accounts opened before the end of 1999.

Happily, it also found that investors didn't panic during the bear market. They didn't pull large sums out of stocks, and they generally kept contributing new money into their accounts.

Here's the rub: Total account values fell only modestly because most accounts are so small that new contributions made up for the falling values of older investments.

Among the 15.5 million accounts studied, the average balance at the end of 2002 was a too-small $39,885.

The average investor had 62 percent of his or her 401(k) money invested in stocks or stock funds.

Generally, that's good. Most asset allocation models call for holding 50 percent to 70 percent of assets in stocks and stock funds, with the rest in bonds and cash, although investors well into retirement are usually told to trim their stock holdings somewhat. Stocks are riskier than bonds and cash but usually have provided bigger returns over long periods.

Unfortunately, too much of 401(k) investors' stock holdings are in stocks of the companies for which they work. By having so many eggs in one basket, they take on too much risk.

Overall, about 16 percent of investors' assets were in this so-called company stock. That doesn't look too bad, but the view is distorted by the fact that half the plans didn't offer company stock.

Among investors who had the company-stock option, more than half had more than 20 percent of their assets in company stock, and 14 percent had more than 80 percent in company stock.

Many companies use their own stock to make matching contributions, and many had rules that prevented investors from unloading their company shares.

A bill to give 401(k) participants the right to sell company stock after three years passed the House last spring but is bottled up in the Senate.

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