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David Pitt

For 401(k) investors the dives are dramatic, but the recoveries can be, too

By David Pitt
Associated Press / August 10, 2011

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After losing as much as a third of their retirement savings in the 2008 financial crisis, 401(k) investors weren’t anticipating another steep market slide so soon.

Many workers over 40 had kept their money in stocks, hoping to repair the losses and get ahead. That paid off for many. The more than 110 percent climb of the Standard & Poor’s 500 index since the market bottomed in March 2009 restored some vigor to discouraging account statements. Those who continued to contribute to their 401(k) plans saw their balances recover.

But the debt ceiling debate stirred the market in July and early August, helping to fuel a 13 percent drop in the Dow Jones average, including heart-stopping days like Monday, when it fell more than 600 points.

It was all just too much for many investors.

Transfers in the 4.7 million 401(k) accounts monitored by consultant Aon Hewitt exceeded $1.6 billion on Monday, more than three times the normal level of activity.

Assets moved Monday were taken out of stock funds and invested primarily in bond funds.

“Psychologically it goes back to the point that we’ve had two bear markets in 10 years,’’ said Adam Bold, founder of the Mutual Fund Store.

The investors who lost the most in 2008 were the workers who had spent the longest time building up their accounts - those in their 40s and 50s who had remained in a 401(k) plan for more than 20 years. The majority had recovered their losses and had more money in their accounts at the end of June than they had before the 2008 market collapse.

However, this latest downturn hurt the same group again.

It’s good to know, however, that because most 401(k) accounts have a mix of stocks, bonds, and other investments, they typically fare better than the broader market in a downturn. The S&P 500 fell 15 percent from June 30 through Monday’s close. However, 401(k) accounts monitored by the Employee Benefits Research Institute were down between 6.6 percent and 9.5 percent.

That highlights the importance of having a diversified portfolio that reflects your years until retirement and your personal risk tolerance.

One of the most damaging behaviors retirement investors can engage in is pulling all their money out when markets drop. This typically means they’re locking in losses at the bottom of the market, and they often fail to reinvest before a market rebound.

Dramatic moves seem to be more the norm these days, and investors can probably expect more volatility. “Corrections are happening faster now, but it’s the same thing with recoveries,’’ Bold said.

A few years ago, Aon Hewitt research indicated that investors who sought help improved their annual performance by 1.86 percent. The research will be updated to include 2009 and 2010 behavior.

David Pitt writes for the Associated Press.