Is this a viable way for employees to replace income? Should employers abandon helping employees achieve a level of financial security?
A report by Jack VanDerhei of Temple University Business School, published by the Employee Benefit Research Institute in November, offers hope. It indicates that the 401(k) plan accumulations of employees who contribute from their late 20s until retirement -- when combined with Social Security payments -- should provide sufficient income for the standard of living recommended by financial advisers.
The study considered whether 401(k)s would be an effective vehicle for retirement savings for employees retiring between 2035 and 2039. VanDerhei says projected retirement income from 401(k) distributions is likely to be significant despite brief periods of poor stock market performance.
VanDerhei took the worst three contiguous years and concluded that if you have been in a plan for your entire career, you would have a sizable replacement rate for the income you received while working. This holds true even if stocks perform poorly, as they did during the worst 50-year period in the history of the stock market, from 1929 to 1978.
The only projected situation that causes accumulations to drop significantly is failure to have continued access to a 401(k) plan. In other words, employers who wish to stay competitive should not abandon this tool to attract and retain employees.
The research was based on data covering 2.5 million plan participants. The model assumes participants will continue current contribution patterns, with the average 401(k) participant contributing 4 percent to 6 percent of income. Projections included participants' income, contributions, withdrawals, and loans and asset allocations from the end of 2000 until retirement.
VanDerhei says reports of heavy losses and widespread changes in participant behavior are not universally true. Heavy losses have typically been concentrated on those who only very recently got into the 401(k) system and suffered setbacks.
The moral of the story? Stay diversified and properly allocated, and continue your participation. How to reach: Ralph Antolino Jr. is president of Antolino & Associates, (614) 442-3355 or www.antolino.com