My recent blog post on 401(k) accounts has generated controversy among some Vanguard investors.

Perhaps the biggest complaint was that I was trying to distort statistics by focusing on the change in 401(k) account balances during 2008. The evolution of account balances—what economists might call your stock of 401(k) wealth—includes both investment performance and account contributions.

As I noted, among more than 3 million 401(k) investors in Vanguard’s recordkeeping system, many did not experience the shrinkage in wealth captured in that now-popular phrase, “My 401(k) has become a 201(k).” Of course, some participants did feel the full brunt of the market’s decline; they had large account losses. But most had smaller declines in wealth—or an increase—because of the impact of diversification (most participants are not 100% in stocks) and ongoing contributions.

The evolution of 401(k) wealth over time is important for two reasons. One is straightforward: Retirement wealth is derived not only from investment returns but also from contributions. A second reason relates to risk perceptions. Individual perceptions of risk, I would argue, are shaped as much by changes in balances, which for the typical 401(k) participant include contributions, as by pure investment performance alone.

In a sense, the wealth shock experienced by some investors from falling markets is partially offset by new money. This “contribution effect,” if you want to give it an official name, may be one of the reasons that most 401(k) participants tend to stay the course and do not alter their portfolios in response to falling markets.

Some readers thought the participants with the smallest losses were likely to be older investors who did not invest in the equity markets. We looked at the question in a recent report (see Figure 11 on page 8). It turns out, for example, that the declines in account balances affecting pre-retirees (those age 55–64) were not much different than for participants overall.

Some also worried about the negative first quarter of 2009. We’ve also published statistics including that period (see Figure 6), and they were more negative than the results for only 2008. Since then, of course, the market is back where it was at the end of 2008.

A smaller group of commentators were more supportive of my argument. They noted that, despite the dire headlines, their accounts had fallen less than the headlines might suggest.

The bottom line, it seems to me, is that 401(k) account results are not monolithic, and indeed, for the typical participant, conditions do not appear to be as dire as some think. This fact does not assuage those of us with aggressive allocations and large losses. It just underscores that those of us with the largest declines in wealth are not the norm.


• All investments are subject to risk. Past performance is no guarantee of future returns.

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