Between the market rally and 401(k) investors’ steady contributions, balances are higher than what they were before the financial crisis hit, according to a Vanguard report, “Recovery in 401(k) Balances,” based on an analysis of the 1.7 million investors that Vanguard serves. What’s more, despite the intense scrutiny on target-date funds, some of which dramatically lagged their benchmarks in 2008, portfolios invested solely in target-date funds did better than others.

Vanguard found that 60% of investors who were invested in a 401(k) plan for at least two years had the same or a higher balance than at the stock market’s peak in October 2007. Of the remaining 40% of those investors who had lower balances, the majority suffered losses of less than 20% at their earlier peak value.

Also benefitting investors, Vanguard said, was that their portfolios were generally well diversified beyond stocks.

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

The study also found that 71% of Vanguard investors whose portfolio was entirely invested in a target-date fund, regardless of the intended retirement year, saw their account balances return to or exceed the level of two years ago, with the median balance increasing more than 80% in this timeframe.

Jean Young, a senior analyst with the center, said the reason for this strong growth was due to two reasons. “First, most target-date investors have been contributing to their accounts for a limited period, so ongoing contributions benefited the smaller account balances more,” she said. “Second, with the diversification inherent in their target-date portfolios, target-date investors do not have all of their savings invested in equities.”

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