"Lost Decade" For 401(k)'s Not Over
With the Dow Jones Industrial Average closing at a record high today, some commentators have been declaring an end to the stock market's so-called lost decade, arguing that investors who had the patience and intestinal fortitude to stay in the market during the recent crash have now come out ahead. That's undoubtedly the case for no shortage of individuals. But for retirement savers as a group, the reality is more nuanced – and data about the assets held in retirement plans suggest that, as a group, many investors in 401(k) plans and IRAs are still struggling to make up the ground they've lost since the last Dow high, in October of 2007.
Retirement assets represent about 35% of the average household's wealth, and they're a decent proxy for the well-being of the average (i.e. interested-but-not-necessarily-sophisticated) investor. Of course, any argument that relies on data about retirement plans needs to be packaged in a thick, childproof container of caveats. Total asset figures don't directly reflect portfolio performance, since they're puffed up by new money (employee and employer contributions) and deflated by withdrawals, as retirees leave the workforce and start drawing down their nest eggs.
All that said, a look at aggregate historical data on 401(k)s and IRAs is a little bit sobering.
According to information compiled by the Investment Company Institute, the mutual-fund industry's professional association, total assets in IRAs and defined-contribution retirement plans totaled $9.18 trillion at the end of the third quarter of 2007, right after the last Dow peak. Then the stock-market slump began, and by the end of the first quarter of 2009, that figure had fallen 26% to $6.79 trillion—bringing total assets back to where they were in 2005. Balances rebounded to their pre-crash levels sometime in the 4th quarter of 2010, and by the end of last year's third quarter (the most recent data ICI offers) they'd reached $10.34 trillion. (Since then, the stock market is up another 6% or so.)
As a whole, these figures may sound like a win for retirement savers – and indeed, Fidelity Investments recently announced that their customers' average 401(k) balances had reached record highs. But the extra trillion-plus that investors accumulated in the five-and-a-half years after the last high doesn't look that impressive in percentage terms: It represents gains of about 2.4% a year. And adjusted for inflation, balances have risen by a total of just 1.46%–for an annualized return that's a hair under 0.3%. Again, we don't know how exactly that number reflects actual investment performance (see all the caveats above). But considering that many retirement-planning scenarios count on a pre-inflation return of 6% or more, it certainly suggests that many savers remain well behind where they'd hoped to be.
Jump back to the Dow's pre-2007 high – just before the tech meltdown in 2000 – and the aggregate numbers look a little better. Since year-end 1999, IRA and defined-contribution plan assets are up 2.1% a year after inflation. That's a return assumption that some financial planners, including RetireMentor Wade Pfau, believe is good enough to base a retirement-planning strategy around. But again, in the period since the last Dow peak, many retirement savers presumably haven't even cleared that modest bar.
Here's hoping the next five years wind up looking better than the last five.