Study: Retirement Savers Keep Plugging Away

This comes as no surprise: Employees’ 401(k) plans were hammered in 2008, with the stock-market collapse trimming the average account balance by 24.3%.

But a new report by the nonprofit Employee Benefit Research Institute offers some encouraging news as well, and sheds light on ways employees might boost their prospects of retiring comfortably.

Rather than panicking and pulling their money out, or switching to holdings that were super-safe but unlikely to grow substantially, the typical employee stayed the course, maintaining a healthy mix of stocks and bonds.

As a result, the average account actually increased at an annual rate of 7.2% for the five years ended 2008, ending the period at $86,513.

Growth in account size is not the same as investment return, because it includes new contributions by workers and their employers. The growth means employees kept plugging away, putting money in every week or month.

That’s good news, because 401(k)s and similar workplace investment plans have replaced traditional pensions as the key way to fund retirement, aside from Social Security.

Still, the EBRI report reveals a few things the typical 401(k) participant could do better.

About 56% of employees’ assets were invested in stocks. That’s close to the 60% rule of thumb. Although stocks obviously carry a risk of loss, they’ve traditionally provided bigger returns than bonds or cash over long periods. Investors need those bigger returns to get real growth after accounting for inflation.

But many 401(k) participants had a sizeable portion of their stock holdings in shares of their own company. About 10% of the typical account was in “company stock.” That’s a lot of eggs in one basket.