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CNN Live At Daybreak
Picture for Retirement Savings Accounts Brighter Than Believed
Aired August 13, 2001 - 07:16 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
COLLEEN MCEDWARDS, CNN ANCHOR: You may have been shocked when you heard how far 401(k)s plummeted last year, because of the losses in the stock market.
Well, a new report suggests that the 401(k) picture is much brighter than first believed.
CNN's Brooks Jackson is in Washington with this exclusive.
(BEGIN VIDEOTAPE)
BROOKS JACKSON, CNN CORRESPONDENT (voice-over): The news was scary -- retirement savings accounts devastated by a plunging stock market.
But hold on. Is the picture really as gloomy as the public was told?
UNIDENTIFIED MALE: I think that they have ended up getting badly misled.
JACKSON: A new study, the most detailed yet, paints a much different picture of what happened last year to those 401(k) retirement accounts. An earlier study said the average of all accounts plunged 10.3 percent last year. Ouch!
But the new study, by the Employee Benefit Research Institute, says the average person's account hardly changed at all -- declining only one-tenth of 1 percent.
(on camera): The earlier report overlooked the fact that millions of people, who owned accounts in 1999, had changed jobs or retired by last year, taking their big accounts with them replaced in the sample by new employees with smaller accounts.
So that earlier report wasn't even comparing apples and oranges, more like comparing two different bowls of fruit salad.
(voice-over): The new study, using a huge database that includes 26 percent of all 401(k) participants, painstakingly compares apples to apples, checking what was in each particular employee's account in '99 vs. what the same employee had a year later. Accounts are identified internally only by numbers, by the way, not names. So the apple's privacy is protected. And it turns out young employees, those in their 20s, actually saw a big average gain in their 401(k)s -- account balances up nearly 27 percent.
(on camera): These young workers had little to lose -- average starting balances of just over $8,000. So any investment losses they suffered were more than offset by contributions -- new money going into the accounts from employees and their companies.
(voice-over): Employees in their 30s gained too -- balances up more than 5 percent; even those in their 40s -- up 1 percent. Employees in their 50s with starting balances of nearly $100,000 did see a decline, but only 2.3 percent. Those in their 60s saw the biggest decline, nearly 6 percent. But some of that could be due to money being pulled out for retirement -- the very purpose for which it was saved and invested in the first place.
(on camera): Now, how can all this be, given that many dot-com stocks lost 90 percent of their value last year, and the Nasdaq market overall plunged 37 percent? The answer is account holders wisely diversified.
(voice-over): On average, 401(k) assets are heavily weighted to stock funds and individual company stocks, but also include lots of guaranteed income contracts, bond and money funds and balanced funds too.
UNIDENTIFIED MALE: People can make smart choices. People can make stupid choices. This data indicates that people made reasonable decisions in spite of tremendous market volatility.
JACKSON: The stock market has come down even more since last year. But this latest study suggests any decline in retirement account balances this year will be less than the decline in the market.
(END VIDEOTAPE)
MCEDWARDS: And Brooks Jackson is here with right now for more on this.
I guess it's good news, Brooks. But why should people believe this study over any other one?
JACKSON: Well, Colleen, this study is based on the largest database that exists of what's in individual 401(k) accounts. And it took a while to do it, but they managed to compare what was in eight million accounts last year vs. the year before. And that's a straight apples to apples comparison.
MCEDWARDS: All right. Well, if it turns out people really can make good choices, as one of the people in your piece says, what does this mean for reform of social security?
JACKSON: Well, this earlier report had entered the social security debate and was cited as evidence that allowing people to direct their own retirement accounts was really quite too dangerous, and that the idea of individual retirement accounts within social security -- privatizing a part of social security was a bad idea.
This new data suggests that people diversified -- that losses, even among people in their 50s, was not nearly as much as reported earlier. I think this number will also enter the social security debate as time goes on.
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