Each year in August we publish a compendium of statistics about 401(k) plans administered at Vanguard. As the report covers over 3 million American participants, it often generates a lot of interest from the media, policymakers, consultants, and employers. (You’re certainly welcome to read the entire book—please do!—but for the CliffsNotes version, just take a look at the executive summary.)
Given the profound human interest in novelty of all kinds, we are challenged every year to come up with some variation, some new fact or circumstance, associated with the evolution of 401(k) plans in a given year. Certainly for 2008 the unique circumstance was the markets. The ’08 market decline was one of the worst on record, and so its impact reverberates throughout the study.
But truth be told, the reverberations are quite modest. Yes, a few 401(k) savers reduced their contributions or quit saving in their 401(k) plans. Some (about 2%) panicked and shifted all of their money out of the stock market during the year. There was an uptick in hardship withdrawals, linked undoubtedly to the mortgage fiasco as well as the economic decline, and a slight increase in the number of individuals cashing out their savings when changing (i.e., mostly losing) their jobs in ’08.
And yes, there were some novel 401(k) innovations that continued to expand, like automatic enrollment (where your employer gets you started saving automatically) or the Roth 401(k) (which allows you to bet on rising tax rates in retirement). And there was continued growth in target-date funds (for those looking for a simpler approach to investing).
But the report reminds me of an analogy. Pension and retirement programs are slow-moving and slow-changing systems. They are the oil tankers of the finance world. New trends take hold, but slowly. The retirement tankers are headed in a given direction, and very few events, either balmy weather or stormy seas, cause them to change course. And even in gale-force winds, they plod on, wave after wave, mile by mile, toward their intended destination.
So, yes, the 401(k) oil tanker plods on, sunny skies or stormy seas. Most participants continued to save for the future and invest in risky (i.e., stock/bond) portfolios. Balances fell in the market downdraft, and have already begun their recovery. For 401(k) plans, 2008 was not unlike 2007 or 2006. Even amidst the market downturn, the tanker continued on its course, largely unperturbed and still moving ahead.