Last year average defined contribution plan participants (drawn from Vanguard’s recordkeeping client base) lost 13.3% on their investments, compared with a 22.1% drop in the stock market overall, and a 9.8% decline in a balanced composite index comprised of 60% stocks and 40% bonds. In fact, a fifth of participants (22%) actually made money or broke even last year, generally as a result of their decision to invest in fixed-income options, according to Vanguard.
Those trends have held true throughout the bear-market run. Over that three-year period, while seven out of 10 participants lost money, and nearly half lost more than 20% cumulatively, nearly three out of 10 made money or broke even. Over the past three years participants lost 6.3% on an annualized basis, while the market fell at an annual rate of 14.6% per year, according to Vanguard. Over the past five years, participants in Vanguard-administered plans eked out a 0.2% per year personalized return, compared with a slight decline in the market.
The “Contribution Effect”
At least some of that inertia might be rationalized by what Vanguard terms the “contribution effect” – the fact that the amount of new contributions overcame or at least muted the impact of the negative market returns on participant accounts. For example, in 2002, median account balances among all Vanguard participants rose by 1%, even though the median account’s investments lost 13.3% on a personalized basis. Vanguard suggests that the positive impact of ongoing contributions may have softened the psychological impact of the falling equity markets in participant eyes – and may have provided encouragement to “stay the course” in both their level of savings, and in their apparent comfort with existing asset allocations.
Vanguard notes that participant allocation to equities has declined by 10 percentage points over the past three years, but that only 40% of that shift has come from participants actively moving from stocks to other options. Most (60%) of that shift has come from the level of decline in equity values – and at a time when participant transfer volumes have remained near average.
In fact, during 2002 the vast majority (85%) of participants made no investment changes in their account – comparable with 2001 activity, and lower than that typical in the 1998 to 2000 period, according to Vanguard. Those that did transfer tended to be slightly older (46 versus 44) than non-traders, and more tenured (nine years in the plan) than those who made no transfer (7.5 years in the plan). More significantly, those who initiated a transfer had a significantly higher account balance, on average, than non-traders – $40,745 versus just $18,134 for non-traders. Additionally, while in 2000 nearly a third of the assets administered by Vanguard transferred, in 2002, less than 19% moved.
Most likely to suffer losses were younger participants, who tended to have more invested in stocks, and who were also more likely to have smaller balances, where the impact of losses was magnified. Not that a heavy allocation to bonds was the best place to be in 2002. Vanguard noted that the 20% of participants who enjoyed returns of 30% or more last year were principally invested in a handful of cyclical stocks that performed well despite the overall market slump. On the other hand, a portion of those that lost 20% or more last year was invested in company stocks that shed more than 90% of their value.
At year-end 2002, participants had allocated 64% to equities and 36% to fixed income, in contrast to the 73% stocks/27% bonds allocation in place at the end of 1999.