The typical 401(k) participant now has greater 401(k) retirement wealth than before the severe market downturn, according to a new Vanguard report entitled “Recovery in 401(k) Balances.”

The research also shows that investors holding solely target-date funds had even more positive outcomes relative to other participants, according to Vanguard.

The study looked at Vanguard participant balances between September 2007 and September 2009, a period during which the market peaked in October 2007 and declined dramatically in 2008 and early 2009.

As of September 2009, 60 percent of continuous participants had the same or a higher account balance than they had at the stock market’s October 2007 peak. The balances of 40 percent of continuous participants were lower, although most of them had balances that are less than 20 percent below their earlier peak value.

The organization concludes that three factors led to a meaningful improvement in the retirement holdings of Vanguard 401(k) and other defined contribution plan participants:

o Ongoing contributions to those accounts by participants and matching contributions by plan sponsors.

o The balanced portfolio construction of participant accounts; most participants are not exclusively invested in stocks.

o The sharp increase in stock prices from their March 2009 lows.

“The main reason for the recovery in 401(k) balances is ongoing contributions. Both investment returns and contributions jointly determine retirement savings,” says Stephen P. Utkus, head of the Vanguard Center for Retirement Research.

“Growth in one of those factors can offset losses in another over a given period. Our evidence suggests that ongoing contributions plus improvement over time in the capital markets may restore many more of these individuals to their pre-October 2007 wealth levels, perhaps more rapidly than previously anticipated,” he says.

The study also found that 71 percent of pure Vanguard target-date fund investors saw their account balances return to or exceed the level of two years ago. The median pure target-date investor’s account increased more than 80 percent during the period.

“Pure target-date fund investors fared better throughout this period than many other investors for two primary reasons,” explains Jean Young, a senior analyst with the Vanguard Center for Retirement Research.

“First, most target-date investors have been contributing to their accounts for a limited period, so ongoing contributions benefited the smaller account balances more,” Young says. “Second, with the diversification inherent in their target fund portfolios, target-date investors do not have all of their savings invested in equities.”

Researchers looked at 1.7 million participant accounts in defined contribution plans at Vanguard between September 30, 2007, and September 30, 2009. Pure target-date fund investors represented 5 percent of the 1.7 million account sample.