As of early 2011, the financial markets had regained about 80% of their value from the October 2007 peak reached before the onset of the Great Recession. Citing this recovery, some observers have optimistically concluded that the long-term impact of the financial market collapse on workers’ 401k and retirement plans will be relatively minor. Also, many observers note that 401k employee contributions held steady throughout the recession – another positive factor.
But a top-level overviews of the financial market recovery can hide the permanent damage done to 401k and retirement savings for millions of workers. Here are five ways that the Great Recession permanently scarred 401k retirement savings for millions of American workers:
- Older Workers – Older workers with substantial investment in equities were more negatively impacted as they were more likely to have had higher account balances prior to the downturn and thus to have suffered greater absolute losses than younger workers. With fewer years left in the workforce these workers may be unable to recoup their losses through additional saving and investment.
- Employer Matches – As a result of the financial crisis and economic downturn, many plan sponsors reduced or suspended employer matching contributions and a large number of employees have been affected by these reductions. The Wall Street Journal reports that 20% of companies having 1000 or more employees suspended their matches during the recession. In addition to losing the matching contributions, a 401k participant forgoes the compounding investment income on those contributions. It is reported that recovery of the economy has spurred many companies to reinstate employer matches. But unless the reinstituted match is larger than it had been previously, a reduced or suspended match means lower contributions now and permanently lower account balances at retirement.
- Extended Unemployment – The primary impact of the economic recession on millions of individuals and families has been unemployment or reduced wages. Either of these can induce plan participants to use their 401k assets for nonretirement related purposes. Extended unemployment almost certainly has a negative effect on an individual’s retirement income. The extent of the damage will vary, but whether through cessation of employee or employer contributions or even tapping into pension assets for near term needs, being out of work for any length of time is likely to affect a person’s ability to save and perhaps even the ability to preserve accrued retirement savings.
- Tax Penalties – To make matters worse, in addition to eroding retirement savings, withdrawals from a 401k account prior to age 59-1/2 generally incur a tax penalty, an additional financial burden to bear. 401k leakage can represent a significant, permanent loss to retirement savings.
- Small-Plan Terminations – Even before the Great recession, the number of small employer-sponsored retirement plans (i.e. under 100 members) were showing signs of decline. The total number of these small plans declined from about 630,000 in 2003 to about 626,000 in 2007, according to Department of Labor estimates. Although plan-termination data for 2008, 2009, and 2010 are not yet available, there is fear that the trend of declining small-employer 401k’s accelerated as these companies battled to survive.