Age, job tenure and account balances reveal how downturn impacts 401(k)s.

It doesn't come as too much of a surprise that 401(k) accounts are being hammered by the economic downturn.

Certain patterns were revealed depending on a person's age, job tenure and account balance by the Employee Benefit Research Institute, which looked at 21 million participants in its database between Jan. 1, 2008 and Jan. 20, 2009.

Those with less than $10,000 in account balances had an average growth of 40% during 2008, mostly because contributions had a bigger impact than investment losses, said Jack VanDerhi, research director who followed the data for EBRI. However, those with more than $200,000 in account balances had an average loss of more than 25%.

Account activity for those on the verge of retirement (ages 55-65) had changes that varied between 1% for people who had been with their current employer one to four years to more than a 25% loss for those with tenure of more than 20 years.

[FIGURE 1 OMITTED]

[FIGURE 2 OMITTED]

"There has been considerable discussion recently as to what the current market downturn might do to retirement ages," VanDerhi said. "This is a natural question to ask after observing the account balance declines for many of the participants in the study. However, for many individuals [and] households, this will depend on far more than just the 401(k) balances with the current employer."

Estimates from the EBRI 401(k) database show that many participants near retirement had exceptionally high exposure to equities. Nearly one in four between ages 56-65 had more than 90% of their account balances in equities at year-end 2007, and more than two in five had more than 70%. VanDerhi said as a result of the Pension Protection Act of 2006, many 401(k) plan sponsors appear to be offering lifecycle and target-date funds, which automatically rebalance asset investments into more age-appropriate allocations.

"Had all 401(k) participants been in the average target date fund at the end of 2007, 40% of the participants would have had at least a 20% decrease in their equity concentrations, and consequently, may have mitigated their losses, sometimes to an appreciable extent," VanDerhi said.

As for how long it will take for 401(k) account holders to recover because future performance is hard to predict, VanDerhi looked at a range of equity returns. At a 5% equity rate of return assumption, those with the longest tenure with their current employer would need nearly two years at the median to recover. If the equity rate of return is assumed to drop to zero for the next few years, this recovery time would increase to approximately 2.5 years at the median, he said.

The outcome of how 401(k) plans will continue to be affected is tied in part to the growing number of employers cutting back on matching contributions. VanDerhi said there has also been an increase in the number of employees taking out 401(k) loans or hardship withdrawals in recent months because they can no longer tap the equity in their homes to pay down credit card debt.

[e-mail]