Jason Woodward has barely broken even after dutifully pumping money into his 401(k) retirement account for 10 years.
“I may be a little bit ahead, but not much,” said Woodward, 39, an employee of United Construction & Engineering in Torrington, Connecticut.
He’s better off than many 401(k) investors in their 30s who began saving a decade ago, according to data compiled by the Centre for Retirement Research at Boston College. A median-income worker who put 9 per cent of salary into an all-stock plan would have finished the decade ended March 31 with almost $10,000 less than he or she invested, a loss of 26 per cent, the center found. With investments divided equally between stocks and bonds, the drop would have been 3.9 per cent.
“There are days when it makes me extremely nervous,” said Woodward, whose wife, a state government worker, has her own retirement plan. “I’m glad I’m not retiring tomorrow.”
Investors in their 30s were too young to build their retirement accounts in the rising stock market of the 1980s and 1990s. Over those two decades, the Standard & Poor’s 500 Index climbed an average of 18 per cent a year, including reinvested dividends, according to Bloomberg data. In the 2000s through March 31, the benchmark fell 4.7 per cent annually.
US Representative George Miller, a California Democrat, held a hearing in February to highlight what he described as the shortcomings of 401(k) plans. Miller, chairman of the House Education and Labour Committee, called the plans “little more than a high-stakes crapshoot.”
Alicia Munnell, director of the Boston College center, testified about the harm the decline in stock prices had done to account balances. The centre’s data, which is awaiting publication, was an attempt to quantify the extent of the damage.
Boston College’s researchers made a series of assumptions to generate return data for their typical investor. They started with a 30-year-old worker who on March 31, 1999, earned $36,000, then the median salary for a head of household of that age covered under a 401(k) plan, according to the US Bureau of Labour Statistics. The base salary was increased 3.3 per cent a year, roughly in line with US wage growth.
The researchers also assumed the investor consistently contributed 6 per cent of salary to the plan and that the employer added the equivalent of 3 per cent, or $38,406 over the decade. Retirement-plan fees weren’t factored into returns.
