Last Updated: August 10, 2009
Many Americans who have a 401(k), an IRA or both may be fearful to look at the balances in their accounts these days. After all, the balances in such accounts have fallen dramatically according to a recent Employee Benefits Research Institute (EBRI) report.
Reflecting the significant downturn in the economy, median asset levels in defined contribution plans, including 401(k) and IRA/Keogh plans, dropped at least 15 percent from year-end 2007 to mid-June 2009, according to an analysis of Federal Reserve data published by the nonpartisan EBRI.
According to EBRI:
- Among all families with a defined contribution plan, the median (mid-point) plan balance was $31,800 in 2007, up 16 percent from 2004, the date of the previous Survey of Consumer Finances release. According to EBRI estimates, this dropped 16.4 percent (to $26,578) from year-end 2007 to mid-June 2009. Losses were higher for families with more than $100,000 a year in income (down 22 percent) or having a net worth in the top 10 percent (down 28 percent).
- IRA/Keogh plans: Among all families with an IRA/Keogh plan, the median value of their plan was $34,000 in 2007, up 3 percent from 2004. EBRI estimates this median value dropped 15 percent (to $28,955) from year-end 2007 to mid-June 2009.
"Over the past months, there is seldom a day that goes by where there is not a story capturing the impact of how the recent market fall has savaged a family's retirement plan," said FPA member, Mark Flaherty, CFP®, of Virginia Asset Management. "Each of these stories is as devastating as it is real."
But devastation shouldn't lead to inaction or inertia. Instead, financial planners and others recommend that you should do the following with your retirement accounts given the current state of affairs:
Keep contributing. Financial planners and other experts suggest that you should keep on contributing to your 401(k) and IRA plans. To paraphrase, Craig Copeland, EBRI senior research associate and author of the EBRI report suggests, if you continue to contribute to your retirement accounts you'll be in a position to "accumulate added wealth as the economy recovers." It's probably worth checking the percent you are saving or contributing to retirement and working with a financial planner to determine whether you need to adjust your contribution given your goals.
Create an investment policy statement. Often financial planners will use an investment policy statement to determine the appropriate asset allocation given your time horizon, risk tolerance and goals. "You really, really have to treat your 401(k) like an investment rather than a tax code section," said Flaherty. "That means you have to critically and objectively review performance vs. the risk you are willing to accept, measure performance vs. an accepted benchmark, and make modifications and changes when appropriate based upon analysis." In short, you have to "be involved" with your retirement accounts — 401(k)s and IRAs are not 'set-and-forget' investment accounts. It's also probably worth checking with a financial planner to get a sense of whether your asset allocation, the percent you invest in stocks and bonds and other investments, is prudent or not.
Establish a target. Part of creating an investment policy statement requires that you establish a target, an amount that you want to accumulate in your retirement accounts. Besides giving you something to save and invest toward, having a target puts you in a position "to perform the 'mid-course' corrections and changes necessary to increase, what Flaherty refers to as your 'probability of retirement.'" You want to "hit your target," said Flaherty. "So manage your 401(k) as if your retirement depends upon it — it does.
Periodically review your asset allocation. "People put money into their retirement accounts but do little towards periodic evaluation and management," said Flaherty. "This doesn't mean that you can be constantly making changes," he said. "But it does mean you should be making conscious decisions, setting benchmark and action triggers."
Work with a planner. Saving and investing for retirement often requires the help of a financial planner. Find a financial planner.
Learn more about EBRI's study.