What's Exactly Is Happening Inside Those Retirement Plans?

We just ran across a vaguely interesting--and somewhat frustrating--item on the behavior of retirement plan participants from Vanguard's Center for Retirement Research (CRR).

The report, which uses year-to-date data through October 31, 2008, collected from plans for which Vanguard serves as recordkeeper, focuses on three primary topics: Trading, account balances, and, loans and hardship withdrawals.

On trading, CRR finds that 85% of participants hadn't made a trade (i.e., an exchange) in their accounts in 2008. That surprised us. But this didn't (emphasis added in bold):

"Our prior research has shown that traders tend to be disproportionately older, richer men who are Web-registered and who often invest in active equity funds and company stock," said Steve Utkus, a Vanguard principal and head of CRR. "This is the psychological profile of the overconfident investor. That said, there are always other participants with different demographic and risk-aversion characteristics who are trading in a given period."

Then the report adds this caveat:

Mr. Utkus also noted that during the recent market volatility, it's possible that a broader range of participants may have decided to make an investment change--that is, a greater number of less-experienced, less-wealthy investors may be included in the group who traded.

The report goes on to note that 34% of participants saw their account balances rise through the end of October, with another 10% experiencing year-to-date losses of less than 10%. Sensibly enough, the report notes that participants' ongoing contributions account for a chunk of these rising account balances, and of course this would be most true for those with modest account balances at the start of the year, for whom salary deferrals represent a relatively larger share of total account values.

Here's one source of our frustration: It would be helpful to see trends in account balances stratified by account balance. Our sense of the situation is that older participants with bigger balances have suffered disproportionately, in part because their ongoing deferrals are such a small part of their overall account values. We'd like to see balance trends presented by quintiles, or by ranges, with the percentage of all accounts in each range indicated on the chart. Or both! We'd like to see these results stratified by age as well.

The last category of interest here is loans and hardship withdrawals. As the chart below indicates, year-over-year change in hardship withdrawals spiked in 2006, remained high in 2007, and has continued to climb, though as a slightly slower pace, thus far in 2008.

We aren't wild about this presentation, either. Visually, it gives the first-glance impression that hardship withdrawals are declining when they're continuing to increase. And by presenting only five years of data (and no narrative explanation on this point), the reader has no information about how these rates of change--let alone the absolute levels!--compare to previous periods.

Bottom line: This report might present some reassuring evidence on participant behavior (and thus outcomes), but we just can't be sure. Edward Tufte would not approve!

Source

"Participants calmer than you'd think amid market turmoil," Vanguard Center for Retirement Research, December 2, 2008

Comments

[clicclic:]

consider the source and it's motives. I'm not saying the report is a whitewash, but it probably isn't investigative journalism either.

The whole 'overconfident' quote is interesting. I jumped into the market in early October selling put spreads because I thought the meltdown was just a small thing. Boy did I get my butt kicked.

The lesson is "never believe your own B.S." Or maybe just hedge against it...

2008 Dec 15 08:30 AM

[Mitch Willi...:]

Where did you go to school, Kevin? Your article title is illiterate, with the verb employed twice.

2008 Dec 15 10:05 AM

[jackooo:]

Mitch Williamson

Get a life. So what if something is wrong. Go to school and teach if that is your claim to fame. This site doesn't need MORE MORONS.

2008 Dec 15 12:15 PM

[RCA:]

On Dec 15 12:15 PM jackooo wrote:

> Mitch Williamson
>
> Get a life. So what if something is wrong. Go to school and teach
> if that is your claim to fame. This site doesn't need MORE MORONS.

Sir, you are correct in the tenor of your admonishment, but sadly lacking in tact. Neither this site, nor any site, needs snarky, in-your-face comments.

A lack of consideration and civility is a co-conspirator with greed in causing the economic turmoil we are seeing. Not until we return to civility will we see an improvement in our fortunes. Not until we eliminate the "me first" mentality will there be any changes in the corrupt system promulgated by greedy corporate executives and politicians.

Please accept an invitation to look at Robert Nabloid's posting on this site this morning. He is on the right track. We each need to take personal responsibility for our own actions, while at the same time insisting on accountability and honesty from Washington and Wall Street. Anything less will destroy us as a society and a world power.

Are we destined to continue to self-destruct into a corrupt third-world state inspired by socialism for the wealthy? I think we can do better than that! Much, much better.

2008 Dec 15 01:07 PM

[Afthought:]

re RCA
"Are we destined to continue to self-destruct into a corrupt third-world state inspired by socialism for the wealthy? I think we can do better than that! Much, much better."

When have we not been a nation based on "socialism for the wealthy." We have always been an oligarchic/plutocratic governed society; just more semantic window dressing because "socialism" is so plebian.

2008 Dec 15 02:09 PM

[RCA:]

On Dec 15 02:09 PM afthought wrote:

> When have we not been a nation based on "socialism for the wealthy."
> We have always been an oligarchic/plutocratic governed society; just
> more semantic window dressing because "socialism" is so plebian.

Regardless of semantic gamesmanship, we can do much better than that.

2008 Dec 15 04:37 PM

[jackooo:]

RCA
I cut through the hype and assemble words that the average man is thinking.
Your thoughtful words are appreciated.

2008 Dec 18 11:20 AM