Though 2011 didn’t yield great gains for workers’ 401(k) plans, many account balances basically held steady for the year, according to data from Fidelity Investments, which handles 11.6 million participant accounts.
The Dow Jones industrial average finished 2011 up by roughly 5 percent after bottoming out in October at 10,655.29.
In its latest quarterly snapshot, released Feb. 9, Fidelity reported that the average 401(k) balance as of Dec. 31 was $69,100. That’s down roughly 3.3 percent from year-end 2010, when Fidelity reported an average account balance of $71,500 – a 10-year high since the company began tracking data for its clients.
The report also showed that participants were staying the course in saving for retirement. With an increase of roughly 1 percent, workers socked away an average of $5,750 in their 401(k) plans for the year, representing more than 8 percent of their annual salaries, according to the Fidelity data.
Eric Peterson, president of Peterson Wealth Advisors, said most growth in retirement accounts comes from contributions – not market increases – which illustrates a crucial point about the importance of consistent saving toward retirement.
“For people participating in their retirement plans, contributions have to continue, and in a period of volatility, dollar-cost averaging is a tried-and-true concept,” Peterson said.
Dollar-cost averaging is defined as buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price, according to
Investopedia.com.
It’s an important investing concept, Peterson said, because the reality is that the market doesn’t always do well.
“We just went through extraordinarily high growth rates for the markets in the 1990s and mid-2000s, but that is not the historical norm,” he said. “People must be using all of the retirement vehicles available to them, including employer plans, traditional IRAs and Roth IRAs to save an increasing amount toward retirement.”
Andy Stewart, managing principal for Waddell & Reed Inc., maintains that the best time to invest is when the market is down, particularly with dollar-cost averaging, because investors can amass more shares that will increase in value as the market improves.
And while Peterson said more investors are getting the message that they need to avoid knee-jerk reactions such as pulling out of the market when it dips, he said they also need to think about increasing their contributions to retirement plans during a downturn – even if they are tempted to do just the opposite and decrease the amount they save.
“If the price of gas goes down to $2.50 a gallon, would you like it better if you had a 50-gallon tank for your car? Of course. So why do people love to buy gas at inexpensive prices, but hate to buy investments while they’re down?” he said.
Fidelity’s report showed that 25 percent of the company’s 401(k) participants have invested all of their assets in target date funds – defined by Investopedia as mutual funds in the hybrid category that automatically reset the asset mix such as stocks, bond and cash, according to a selected time frame that is appropriate for a particular investor.
Peterson said he doesn’t like target date funds because although they take an investor’s age in relation to retirement into account, they don’t necessarily adjust based on current economic conditions.
Rather than pinpointing specific funds or investment vehicles that have the most potential going for 2012, Peterson instead prefers to focus on the opportunity to buy more that comes in a volatile or down market.
“I think that sometime within two years, people are going to be looking back (and) saying, “Wow, I wish I would have bought more then,’” Peterson said.
While some investments such as large cap stocks – for those companies with a market capitalization value of more than $10 billion – may not have experienced declines compared to small-cap or international funds, Stewart cautioned against making future investment plans on past performance.
Two large-cap asset classes – large growth and large value – showed annual returns of 4.7 percent and -0.5 percent, respectively, in 2011, according to The Mutual Fund Research Center.
“Trying to predict the future based on past performance is kind of like trying to drive to work only looking in your rear-view mirror,” Stewart said. “It doesn’t mean we don’t update our portfolio and make changes from time to time, but if you’re just looking at last year’s best-performing sectors, given the business cycle, that’s likely to change. Even though one year, large-cap may be the best-performing sector, the likelihood is that small-cap, international or fixed-income will probably outperform it.”
Both Stewart and Peterson said investors should meet with advisers to make sure their retirement plans reflect their goals – and will sustain their desired lifestyles 25 to 30 years after they leave the work force.
There are other lessons they can take forward as well, Peterson said.
“The most important thing is, don’t make long-term decisions based on short-term situations. Secondly, be very cautious on following the herd. Just because your neighbor says they sold everything and put it in bonds does not necessarily mean that’s appropriate for you,” Peterson said.
According to data from The Mutual Fund Research Center, U.S. bonds showed the best performance among several asset classes, with annual returns of 7.8 percent in 2011.
“Many people have invested very heavily in bonds recently, because their past performance has been greater than equities or stock funds. In my opinion, there is a very large ‘bubble’ in the bond market, i.e., prices are extraordinarily high, which is a cause of concern,” Peterson said, pointing to similar situations with past bubbles in the technology and housing sectors.
Separate data from The Mutual Fund Research Center shows that European stocks were down nearly 19 percent for the year as of Sept. 30, 2011, while U.S. stocks fell 8.7 percent.
With concerns in the global economy – and particularly in Greece, where leaders continue to try to push through austerity measures in a bid to secure needed bailout funds – both Peterson and Stewart cautioned against being overly concerned about effects on retirement investments. Peterson noted that with a positive gross domestic product, the U.S. economy is doing relatively well. And because many companies have a lot of international exposure in an increasingly globalized economy, Stewart said conditions abroad may already have been factored into stock prices in the market.
“I do think there is a reason to pay attention to it and be alert. Concern may be a bit strong, but it’s definitely something we want to monitor just to make sure it doesn’t have too much of a dramatic effect for individual investors,” Stewart said.
