Quick, what's the new name of your 401(k)? Answer: A 201(k). That may be a now aging joke, but it nicely summarizes the congealing conventional wisdom about defined contribution plans. For many critics and skeptics, the collapse of the NASDAQ, Enron, WorldCom and the defined benefit plans at some of the nation's major airlines show that the DC system is failing to work and participants are being left worse off than they were. Young Americans who have only known 401(k)s plans are especially bad off, the thinking goes.

As it often is, that conventional wisdom is wrong.

Just released numbers from the Employee Benefits Research Institute (EBRI) and the Investment Company Institute (ICI) show something interesting. The typical participant who was continuously in a 401(k) plan from 1999 to 2004, saw his or her account balance grow by some 36 percent to $91,000 from $61,000. Moreover, that period includes what the study calls the worst market crash since 1929.

A deeper reading of the study (available in full from the EBRI.org site here) reveals the reason why participant accounts were able to bounce back so quickly from the stock market collapse -- for younger participants savings still matter more than returns.

Workers in their twenties in 1999, for example, had average account balances of just $10,410 in 1999, according to the study. By 2004, those workers' accounts grew to $38,844. For workers in their thirties in 1999, the starting figure was $37,514 and the final figure $63,710.

Meanwhile, workers in their sixties in 1999 lost assets, on average, over the five-year period. In 1999, they had an average balance of $143,161, which then dropped to $136,400 in 2004.

Obviously, adding new savings to an account made more difference than the returns earned by the accounts, especially for younger workers and those with low starting balances.

That insight also holds out some hope for fund firms that have planned to face a mature 401(k) market. Participants rarely rebalance or rethink their asset allocation. That has left newer asset managers in plans at a significant disadvantage to longtime incumbents.

However, the demographics of plans as revealed by the survey show that the typical participant is still at a stage where savings matter more than returns. According to EBRI, the median average account balance is $19,926 while the mean average account is more than $91,000. That means that half of all account holders can grow their account by 10 percent annually with a $2,000 annual contribution and no meaningful return.

Many of those small accounts are owned by older workers who have not had access to a 401(k) plan their entire career, or who changed jobs. Many more, indeed EBRI says the majority, are owned by younger workers who are still in the asset creation phase of their retirement arc.

Few, if any, fund firms are targeting these workers directly.

Asset managers prefer to follow Willie Sutton's famous advice to fellow bank robbers ("Go where the money is") only to find themselves in an already crowded arena, battling for IRA rollovers. Yet EBRI's analysis suggests that what now look like large balance among the nation's near retirees will pale in comparison to those of workers in coming decades.

"Since 401(k) plans were introduced relatively recently (about 25 years ago), even older and longer-tenured employees could have participated in a 401(k) plan for, at most, about half of their careers," the study points out.

That implies that those who started in the workforce during the past decade will see their balances equal those of today's near retirees by the time they reach fifty. And then it is likely that those account balances will more than double again before they retire.

Perhaps someone should be taking the longer view and looking more closely at the young depositors to lock them in while they are impressionable. As innovations guru Clayton Christensen likes to point out, K-Mart did not take Sear's customers when it became the dominent retailer in the 1960s, Sear's customers got old and died and K-Mart captured the young. Just something to keep in mind. 

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