Long-term plans healthy

NEW YORK – A recent study of 5 million households conducted by the Vanguard Group found the ill effects of the bear market are slowly working their way out of long-term portfolios, with a majority of 401(k) and individual retirement account holders finally showing positive returns.

Vanguard analyzed the historic returns of 401(k) and IRA investors for the five years that ended in December of 2004, essentially taking a snapshot of how 5 million households fared in the aftermath of the bull market. According to the survey, more than 80 percent of 401(k) investors and 70 percent of IRA investors made gains or at least broke even over the last five years. Investors in 401(k) or other employer-sponsored defined contribution plans saw median five-year returns of 4 percent, and IRA investors had median returns of 3.2 percent.

Of course, that means a fifth of 401(k) investors and almost a third of IRA investors are still licking their wounds, said Stephen Utkus, head of Vanguard’s Center for Retirement Research. But overall, the results suggest retirement investors are “out of the woods,” and committed to investing, Utkus said.

“Most people feel they’re making money again, or at least they should,” Utkus said. “I’m not sure, psychologically, if we did a poll, people would think they’d recovered. But the numbers show things are looking good.”

In addition to improved returns, the study found a double-digit rise in average balances over the last five years. Investors in 401(k) plans saw their balances rise 12 percent, to $65,216 at the end of 2004, and average IRA account balances rose 13 percent to $52,627.

The Vanguard study looked at the returns of 2.6 million participants in employer-sponsored plans, and 2.7 million investors in its mutual fund IRA program. On average, 401(k) investors were slightly younger and made less money than IRA investors. The median income for 401(k) investors, with an average age of 44, was $84,000; the median income for IRA investors, with an average age of 50, was $89,000.

Account holders in both plans had similar asset allocations – about 70 percent in equities and 30 percent in bonds, or fixed income. But the research showed new money flowing into IRAs was being put to work in more conservative ways. It also suggested that IRA contributors were more likely to make active investment choices. For example, in 2002, at the bottom of the bear market, IRA investors allocated only 50 percent of their new money to stocks, compared with 71 percent for those participating in 401(k) plans.

The fact that many 401(k) investors kept their accounts on autopilot, sticking with their asset allocation even in the worst years of the bear market, worked to their advantage, Utkus said. By comparison, he said, IRA investors “seem much more sensitive to market conditions.”

One of the main differences between IRA and 401(k) plans is the thought process one goes through to make an investment choice. Investors in 401(k)s set their asset allocations when they set up their plan, contribute regularly and rarely make changes. But less than 5 percent of IRAs are on automatic deduction, Utkus said. Most IRA contributors write a check once a year; some may even borrow money to make their contributions at tax time. And when they do, they tend to be more cautious if they think the market’s heading down.