Participant Recession Activity Hurt Savings

Research from the Center for Retirement Research at Boston College found that 401(k) participation and contributions decline during recessions, and the 2008 recession—which the report calls the Great Recession—could lower the 401(k) assets of the typical 30-year-old by as much as 9% at age 62. 

According to data analyzed by the researchers, among wage and salary workers ages 20 to 69, the share contributing to employer-sponsored retirement accounts increased sharply between 1990 and 2001 as employers increasingly offered workers defined contribution (DC) plans (rising from 22.5% to 40.2%). Participation then dipped slightly between 2001 and 2003 (falling from 40.2% to 39.1%) with the 2001 recession, dot.com stock market crash and high unemployment period from 2002 to 2004. After 2003, participation rates increased again, but much more gradually, to peak at 42.7% in 2008. Coinciding with the Great Recession, participation rates fell in 2009 and 2010 to 41.1%. 

Changes in the median DC contribution amounts were similar. Amid booming economies, median DC contributions increased 19.1% between 1992 and 1999 (about 2.5% per year) and 3.7% between 2002 and 2004 (about 1.8% per year). They declined 4.6% between 2004 and 2007 as the booming housing market began to reverse and another 4.9% between 2007 and 2009 (-2.5% per year) with the stock market crash and Great Recession.

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In addition, the percentage of workers investing their DC contributions in bonds increased dramatically with the recession from 38% in 2006 to 54.8% in 2009. Participant’s primary DC investment type shifted away from stock funds with both the 2001-03 and 2008-09 stock market crashes.  

According to the report, if the typical worker had done nothing in 2007 and kept his contributions in 2008 and 2009 at the 2007 level, instead of reducing them, his account balances would have been at least $210 higher at the end of 2009. If he had increased his contributions just 1% each year after 2007, his account balances would have been at least $289 higher at the end of 2009.   

The long-run impacts are even greater, especially when compounded over many years. The typical 30-year-old worker reduced his contributions by $138, or 6%, between 2007 and 2010. His retirement account balance at age 62 is projected to be just less than $134,000. (This assumes contributions begin increasing 1% per year after 2010 and that accumulated balances earn a 3% annual rate of return). If, instead of reducing his contributions starting in 2007, he increased them just 1% each year, his account balance at age 62 would be $145,572—a difference of $11,907 or 8.9%.  

The report can be downloaded from here.