NCPA - National Center for Policy Analysis

401(k) Investors Make Mistakes That Lower Returns

May 15, 2001

Financial experts are only beginning to understand the magnitude of the loss in retirement savings of many 401(k) participants last year. While the fall in stock prices damaged portfolios, the previous run-up in stock prices masked many investing mistakes.

  • According to the consulting firm Cerulli Associates Inc., for the first time ever, over the past year 401(k) plan assets shrank, down $72 billion to close the year at $1.77 trillion.
  • When Cerulli looked at the average participant's balance, it found even deeper losses -- a decline from $46,740 in 1999 to $41,919, or about 10 percent.
  • And that dismal return actually understates the average plan's performance, because this average plan would have received an 8 percent employee contribution and a company match last year.

Yet the number of 401(k) plan participants jumped from 25 million two years ago to 42.1 million now; the number of plans surged from about 200,000 to 327,364 in that time.

Some participants are too conservative and overweight their portfolios with bonds and money market funds, said Brooks Hamilton, of Hamilton & Associates in Dallas, while others are much too aggressive with technology stocks.

As a result, the return on the average of 401(k) plan has lagged the return of institutional investors -- such as those who manage pension plans -- by 2 percent annually, according to Barclays Global Investors.

Some recent surveys have shown that many investors believe a 20 percent return is conservative -- although that's twice the historical returns of the stock market. When investors assume they are going to earn twice the historical return, experts say, they don't save as much as they should and they sometimes go into more debt than they should.

Source: Bill Deener, "Market reveals 401(k) mistakes; Many investors lack expertise," Dallas Morning News, May 14, 2001.


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