For the first time in the 20-year history of the popular 401(k) retirement savings plan, the average account lost money last year, even after thousands of dollars of new contributions. And despite some strengthening of stock prices in the past couple of months, recent estimates show, the declines persisted in the first half of this year.
The trend is exposing years of mistakes by employees, raising some questions about proposals to permit Americans to manage part of their Social Security accounts and clouding the future of many employees' nest eggs for retirement.
The losses have led many individual workers to second-guess themselves, since they are the ones who decide how much to contribute to 401(k) plans and how to invest their money. There are some risks that people cannot control, such as stock-market declines and company contributions that shrink with corporate profits.
But a look at shifting account balances over the past decade shows that many people have grown overly dependent on stocks, do not contribute enough to retire when they expect to and put too much into a single aggressive mutual fund or their own company's stock, financial planners and plan administrators say. And relatively few employers offer much useful help to workers in making crucial investment decisions.
Still, many people seem eager to give Americans more control of their retirement funds. A special commission appointed by President Bush is exploring ways to carry out his campaign promise to permit Americans to manage a portion of their Social Security benefits. Many states are also creating plans similar to the 401(k), so that their employees can manage their money themselves.
For many workers, the 401(k) has long seemed to be a magical, ever-expanding account. The plans grew quite popular, partly because they coincided with the strongest and longest bull market in history. They also provided benefits to workers at many smaller companies that did not have traditional pension plans, they encouraged saving and they created a portable plan well-suited to the modern, job-hopping work force.
But this past year has brought a gloomy crop of 401(k) statements, and that has employees wondering whether they made the right decisions in the first place. The average account shrank to $41,919 in 2000 from $46,740 in 1999, according to a report from Cerulli Associates, a benefits consulting firm. Although comprehensive 401(k) account data will not be available for some time, the average account has since shrunk about $600 more, to about $41,300, according to a rough projection by one Cerulli analyst.
"You could be stupid in the last 10 years and make a lot of money," said Mark Bruggemeyer, a 45-year-old co-pilot for Continental Airlines. "Now you've got to buckle down and start learning all over again."
Bruggemeyer has more than 80 mutual funds to choose from in his 401(k) plan. This never seemed to be a problem before, because the two funds he had picked, almost randomly, kept going up. In the past year, though, the value of Bruggemeyer's technology fund has been cut in half, and his holdings in a diversified stock fund have fallen more than 12 percent.
Like many Americans, Bruggemeyer grew overly dependent on stocks. The average 401(k) account had 72 percent in stocks and stock funds in 1999, according to the latest data available from the Employee Benefit Research Institute, a Washington nonprofit group.
That stance reverses the conservative posture of investors a decade ago and appears somewhat aggressive when compared with the classic allocation of professional pension plan managers: 60 percent in stocks and 40 percent in bonds.
More recent information from Fidelity Investments, which handles a mix of small and large employers' plans as the United States' largest 401(k) administrator, shows an even more aggressive posture. The average Fidelity account had 19 percent in company stock on top of almost 62 percent in stock funds at the end of last year. Owning a large amount of a single stock is riskier than owning an aggressive stock fund since so much rides on the fortunes of one company.
This is not to say any particular worker should abandon stocks or pile into bonds, or that the typical pension fund mix should be copied by workers of various ages and incomes.
Moreover, most pension funds have faced losses as the market has declined. But professional pension trustees work zealously to balance risk and reward in traditional pension plans, and workers also need to have a strategy and stick to it, financial planners say.
"It's wonderful that individual employees are empowered," said Brian Orol, a financial planner in Raleigh, N.C. But he thinks workers do not realize that many companies are using the 401(k) to replace the traditional pension and that the guaranteed retirement income provided to many who retired from the end of World War II through the early 1990s is disappearing.
"I'm very concerned that a significant portion of employees have not put their arms around that concept yet," he said.
Beyond averages, there are signs of many flawed individual choices. Between one-fifth and one-quarter of workers eligible for 401(k) plans do not participate at all, according to the Profit Sharing/401(k) Council.
And while financial planners warn that those close to retirement should take fewer risks with their money, they note that some young people with the longest time frames and the most ability to withstand market shocks invest too conservatively.
At the same time, many baby boomers are behind in their savings, a deficiency that the Bush administration tried to help address by significantly raising the maximum contributions, in the tax bill recently approved by Congress, and permitting those over 50 to contribute even more to catch up while they can.
At another extreme in risk, workers at big companies are overly reliant on company stock. The average account at Hewitt Associates, the nation's second-largest 401(k) provider, which caters to Fortune 500 companies, has almost 30 percent in company stock. If a company fails, employees might lose much of their retirement money along with their livelihood as their jobs vanish.
"I don't know where this is going to lead us over the next 10 or 15 years, when these people start retiring," said Roy T. Diliberto, a Philadelphia financial planner and the chairman of the Financial Planners Association. "Some checks are not going to be there."