No, it wasn't a good year.

But it may not have been as bad as we think.

We are regaled daily with ongoing stories of total losses in 401(k) plans, such as Enron. We also read accounts of losses that are merely devastating, like Lucent. Most 401(k) participants, however, had an 'off' year.

They didn't have a disaster.

You can understand this by walking through an approximation exercise I did. First, I took the asset allocation percentages for 401(k) plans from an Employee Benefit Research Institute study. Then I took the average return, according to Morningstar, in each of the named asset categories. With those figures I could calculate portfolio returns for different age groups.

I found that the portfolio of a participant in his twenties would have lost about 10.3 percent. A participant in his sixties would have lost about 6.7 percent. (See the figures in the table below.)
Figuring the Typical Portfolio Returns on 401(k) Plans
Age Group/ Allocations
20's 30's 40's 50's 60's Avg. Return
Equity Funds







Balanced Funds







Bond Funds







Money Funds







Portfolio Return:






Sources: EBRI, Morningstar
Unless your investments did worse than average--- and it is mathematically given that some did--- these are worst case figures because they assume that you invested once, at the beginning of the year, and didn't make any additions.

In fact, that isn't how you and I invest in our 401(k) plans. We add new money with each paycheck. For young employees, new contributions can overwhelm most losses and the account balance will continue rising--- even when the return is negative. For older employees--- the ones who might have an account balance equal to one or two years of salary--- account growth is more likely to mirror the return on the beginning assets.

This isn't a statistical tidbit.

It means that we are protected, somewhat, by the very nature of 401(k) plans when we are relatively young.

One bit of evidence comes from changes in account balances in the year 2,000--- the first year that most 401(k) plan participants saw sagging equity values. While the average account value slumped slightly over the year, the average account value of participants in their twenties rose by 26.9 percent.


Because they were putting in new money faster than the stock market was falling.

Participants in their sixties, on the other hand, saw their account balances decline by an average of 5.8 percent in the same year. (See table below) This happened because the typical plan participant in their sixties has an account balance equal to many years of contributions.
Falling Market Hits Older Investors, Younger Investors Unscathed in 2000
Account Balances 1999 2000 Change in %
All Accounts $58,850 $58,774 -0.1%
20's 8,219 10,431 26.9
30's 31,518 33,125 5.1
40's 62,059 62,694 1.0
50's 98,139 95,836 -2.3
60's 122,240 115,206 -5.8
Source: EBRI, "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2000,
I see this as very good news--- if you are anywhere from your twenties into your forties, a bum year won't be a disaster. Even the losses experienced by older workers aren't likely to be traumatic unless they made very risky choices.

That's the good news.

The picture changes quite a bit if your 401(k) plan includes company stock. In these plans, even workers in their sixties, according to EBRI, have 26.1 percent of assets in company stock. Younger workers have more. Those in their forties have the most, 34.0 percent.

As I pointed out last January the addition of company stock turns your retirement plan into a Lottery. [ (coming)]

If you win your Lottery, you win big. If you lose, you lose big.

That's a gamble, not a portfolio.

Sunday: Measuring The Lottery Effect, Industry by Industry