Are 401(k)s Still Viable for Saving? Part B

"Everyone wiped their hands of any obligation for retirement, and the burden shifted from the employer to the employee, and the risk is shifted from the employer to the employee," said Rep. George Miller (D-Calif.), chairman of the House Committee on Education and Labor, who last week convened a hearing to examine 401(k)s. "In the beginning, no one ever said, 'Would this be sufficient? Would it work?' and what you see is a plan that is highly responsive to external events unlike Social Security, unlike defined-benefit plans, unlike a public pension plan."

Proponents of 401(k)s say with those greater risks come greater rewards. "If you own equities, you really have to believe in the American capitalist system in that the dollars will find the highest and best use," said Mickey Cargile, a managing partner for WNB Private Client Services, a financial advisory firm in Texas. "Along with that, there will be a period in which the excesses in the market will be purged. That's what we're seeing now. That's what we saw in 1987."

In the past15 months, Americans have lost about $2 trillion worth of retirement savings both in pensions and 401(k)-style plans, Peter R. Orszag, director of the Congressional Budget Office, told Miller's committee last week. Because 401(k)s tend to have more stocks in their portfolios than pensions do, Orszag concluded that 401(k)s have been the biggest losers.

This year, the average account balance of 401(k) participants has dropped 7.2 to 11.2 percent, according to an analysis of 2.2 million plans by the District-based Employee Benefit Research Institute. But many workers have seen even sharper declines in recent months, analysts and economists say. Further draining retirement accounts is that many workers have been allowed to dip into their 401(k)s for loans or so-called hardship withdrawals. That trend has been increasing in recent months because people can no longer tap the equity in their homes to pay down credit card debt.

The experts disagree over how long it takes to recover from a bear market. The financial firm T. Rowe Price found that in the past five bear markets going back to 1976, the longest it took for stocks to recover from their peak and then provide a 10 percent annual compound return was eight years. The shortest was five months.

Sarah Holden, senior director of retirement and investor research for the Investment Company Institute, which tracks mutual funds, looked at the bear market of 2000 to 2002. She found that among participants who stayed in their 401(k) accounts, the average account balance fell 8 percent from 1999 to 2002. But in 2003, the average balance increased 30 percent. Overall, the average balance almost doubled from the 2002 bottom through 2006, she said.

Teresa Ghilarducci, a professor of economic policy analysis at the New School for Social Research in New York, provided a bleak assessment for what might happen this time around. She calculated what you would end up with in 10 years if you had $100,000 in your account in August and lost 20 percent of it last month. If you were paying 2 percent in administration fees, as many 401(k) plans charge, and the stock market remained flat for three years, a real possibility given how it has performed, and then earned 1 percent per year, as it did in the 1970s, you would have $67,000 by the end of the decade, she said.