If you are young(er), if your company continued to match your 401(k) contributions, if you kept your contributions intact, your defined contribution plan has now begun to look as it did before this whole unraveling mess began in 2008. Over the past week, both Fidelity (who suggested that the one-year rate of return of its managed plans is positive by an almost insignificant 0.4%) and Vanguard (who suggested the 60% of the 1.7 million retirement accounts it managed were at 2007 year-end levels) have announced that you are now in positive territory.
This inflection point, a calculus term that describes the change from a downward curve to an upward curve (or vice versa) has these huge plan sponsors proclaiming that the recovery of retirement wealth is now underway. Yet, like so many numbers, the recovery has been selective.
Vanguard Group broke down their observation in terms of age. If you were 25 or younger, participating in your first 401(k), ninety percent of you have seen your the balance in your accounts reach this point. Eighty percent of those between 25 and 35 years-old are now seeing their accounts in far better shape than just twelve months ago. As you age though, the number plummets to about 50% suggesting that those in their fifties have not seen what their younger cohorts are experiencing.
Although neither Vanguard or Fidelity offer the reasons why this older group has seen the least amount of recovery, there are some speculative answers to those questions.
There is a greater likelihood that you have not seen the recovery in your accounts because you failed to do what you had done to get to those levels. Any 2007 account balances were fueled by your own belief that the stock market would always be upward trending. And when those beliefs were shattered, even betrayed, you did what would be considered perfectly normal in almost every other human endeavor, you became defensive. While those defensive moves vary from one account to another, the most common trait was your change in position from aggressive (or slightly more than your age group should have been) to a much more conservative stance. You became a protectionist.
You sold more equity-exposed positions in favor of funds that offered some less aggressive behaviors such as target-date funds. These funds, offering an unproven track record of shifting from stock market exposure to fixed income exposure, seemed a safe haven. They offered protection, at least in theory, from the tumult that Wall Street had become. They offered you a date in the future that almost promised you would have a secure retirement. By simply picking a point when you would like to transition from work to retirement, these types of funds offered you a false hope that you could, somehow recover the wealth you once had by taking less risk.
What these companies are reporting is still disturbing. Vanguard hustles index funds. Fidelity, with 11 million accounts under management, offers a wider range of funds. Both have pointed to the average account balance in their care was now near $60,000. Is this news that doesn’t matter?
There are only three ways to get your accounts back to those 2007 levels. The first is embracing risk. As shocking as that may seem, the stock market recovery is taking place based on the belief that risk will drive the economy. These markets are up because money, long sidelined has reentered the marketplace. Mutual fund investors have increased their contributions forcing fund managers to invest. They know, as you should as well, that this is a very dangerous investment. Much of the recently touted profitability is not based on increase business but a leaner operating one, one without job creation.
The second way to recover these accounts to those previous highs is to ignore the first reason. Risk is risk and it cannot really be used wisely. It needs to be embraced but not loved. For older workers, who are or were once eyeballing those accounts balances with hope in their hearts, this means investing where most suggest would be foolhardy. Keeping a larger part of your investment dollars in equities is craziness. Markets are volatile. They can go either way. And if they go down just at the point when you plan on drawing down those years of continuous contributions, you will have gambled at a point when you should have been holding your cards close. You were more afraid of having to work longer than you should have been.
The third way to get back to those levels is to increase your contribution. If your employer dropped their match, it was your responsibility to increase your contribution to meet the void. Many investors were contributing only what their employer offered as free money. When that stopped, so did your potential for recovery. I have suggested on numerous occasions that when you do increase your contribution you channel that additional money towards a more conservative investment. In other words, stay aggressive on one side and any future dollars you might offer should be done should go towards a more conservative approach.
There are no guarantees when it comes to investing save one: If you fail to invest and do so with the idea that you will encounter ups and downs, unpredictable peaks and valleys, you will not come even close to what your perceive as your retirement goals.
Paul Petillo is the Managing Editor of Target2025.com
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