Volatility Hits 401(k) Plans, Investors Move Into Bonds

By David Pitt, AP Personal Finance Writer

Just when they thought it was safe to go back in the water, many 401(k) investors who were regaining their comfort level with the stock market took another hit.

They certainly weren't anticipating another steep market slide so soon after losing as much as a third of their retirement savings in the financial crisis of 2008. To try and bounce back, many workers over 40 kept their money in stocks hoping to repair their losses and get ahead.

Indeed the strategy paid off for many. The more than 110 percent climb of the Standard & Poor's 500 index since the market bottomed in March 2009 restored some vigor to what had been discouraging account statements. Those who continued to contribute to their 401(k) and stayed invested, saw their balances recover and most were ahead of where they were before the market collapsed.

Then the escalating debt ceiling debate stirred the market throughout July and early August, helping to fuel a 13 percent drop in the Dow Jones industrial average, including heart-stopping days like Monday, when it fell more than 600 points.

It was all just too much for many investors, who flocked to their accounts to get out of stocks.

Transfers in the 4.7 million 401(k) accounts monitored by consultant Aon Hewitt exceeded $1.6 billion on Monday, more than three times the normal level of activity. In a typical day investors make around $300 million to $400 million in 401(k) transfers.

All of the assets moved Monday were taken out of stock funds and invested primarily in bond funds. It was the fifth-highest day of transfer activity since the company began tracking the data in 1997.

"Psychologically it goes back to the point that we've had two bear markets in 10 years," said Adam Bold, founder of The Mutual Fund Store, a manager of $6.5 billion based in Overland Park, Kan. "A lot of people say I can't handle that again."

The investors who lost the most in 2008 were the workers who had spent the longest time building up their accounts — those in their 40s and 50s who had remained in a 401(k) plan for more than 20 years. The majority had recovered their losses and had more money in their accounts at the end of June than they had before the 2008 market collapse.

However, this latest downturn hurt the same group again.

As of yesterday, about 64 percent of middle-aged long-term workers had more money in their accounts than at the 2007 peak of the stock market, according to data compiled by the Employee Benefits Research Institute for The Associated Press. At the start of July, at least 80 percent of that group had more money than they did in 2007.