Since the financial meltdown took hold, one thing is certain: investors’ 401(k) accounts have dropped. The retirement planning industry, along with Congress, is trying to get a handle on just how significant the crisis has been on defined contribution and defined benefit plans.
Jack VanDerhei, research director for the Employee Benefits Research Institute (EBRI), told the House Education and Labor Committee in testimony October 7 that it’s “impossible” to quantify how the financial crisis has affected DB plans, but it is “obvious that a marked reduction in funding ratios and/or increase in volatility may make continued sponsorship of these plans less attractive under some forms of pension accounting modifications.” What’s more, he said, the Pension Protection Act of 2006 (PPA) “has established specific restrictions with respect to freezing of accruals, plan amendments, and lump-sum distributions as a function of funding ratios.” He cited recent estimates from Watson Wyatt, which projected that pension plans would be 84% funded as of September 24, down from 91% in the second quarter.
More is known, however, VanDerhei said, about the impact the financial crisis has had on DC plans, primarily 401(k) participants. While older employees have devoted less of their portfolios to equities than younger employees–which makes people assume that older workers are less vulnerable to downturns in the equity markets–older workers’ “average account balances are significantly larger and therefore have more to lose in a significant downturn,” he said. VanDerhei also cited recent research from Fidelity, which found that participants did not increase their borrowings from 401(k) accounts in 2007 and the first half of 2008. However, Fidelity found that hardship withdrawals are on the rise in the first half of 2008 compared with the first half of 2007.
Losses From -7% to -11%