Misleading Numbers on 401(k)’s

Are you upset about what happened to your 401(k) account during and after the financial crisis? Perhaps you shouldn’t be, says a trade group for the companies that manage those accounts.

An excerpt from a news release put out Thursday by the Investment Company Institute, the mutual fund trade group:

Though the average 401(k) account balance fluctuated with stock market performance between 2007 and 2011, for consistent participants in the database it showed an average annual growth rate of 5.4 percent, reaching $94,482 at year-end 2011 â€" up from $76,534 at year-end 2007. By way of comparison, between year-end 2007 and year-end 2011, the Standard & Poor’s 500 total return index (which measures the large-cap segment of U.S. equities) was down 1.6 percent on average per year and the Russell 2000 Index (which measures the small-cap segment) had a compound average annual growth rate of 0.6 percent.

Wow: 401(k) accounts rose 5.4 percent a year, while “by way of comparison” the stock market about broke even.

Read that carefully, and you’ll see the catches. First, these are 401(k) accounts with “consistent participants.” That means they throw out accounts held by anyone who lost his or her job during the crisis. And since the workers were participating, that means they were putting money into the accounts for four years.

O.K. How much of that gain came from contributions? How much came from investment profits? Would people have done as well if they put the money in their mattresses? (Ignoring, of course, the fact you don’t get a tax break for putting money in your mattress.)

The “study” that the news release links to does make clear that contributions played an important role. But it completely ignores the question of how much. On average, we are told, the balances in the 401(k) accounts in the study declined by 35 percent in 2008. That is, the accounts went down by a third even though the account holders kept adding to them. They then rose by 56 percent in 2009, thanks in part to contributions, followed by gains of 17 percent and 4 percent over the next two years.

But there is not a single fact about how much money was contributed.

I called the I.C.I. and talked to Sarah Holden, the group’s senior director of retirement and investor research. She said they don’t know. The only information they have on many of the accounts is annual balances and in what type of mutual funds â€" equity, balanced, bond, target retirement date â€" the money was invested. She seemed to think that for some of those accounts they might know the contributions, but she was not sure. In any case, that information was not available to the public.

She pointed out that even knowing about contribution totals it would be very hard to calculate a percentage return for an account, unless you knew exactly when every contribution and withdrawal was made. That is true, but it would be easy to get annual totals, and to know that the net investment profit, or loss, for a year was a certain number of dollars.

Wouldn’t it be fun to have the following numbers for a large group of 401(k) participants over the period?

• Balance at end of 2007.
• Contributions, 2008 to 2011.
• Withdrawals, if any.
• Fees earned by fund sponsors and mutual fund groups during the period.
• Balance at end of 2011.
• Net profit for investors. That would be 2011 balance less 2007 balance, less net contributions.

Would that profit be larger than zero? If so, would it be larger than the fees paid to the fund companies?

With those numbers, we might get real insights into who really benefits from 401(k)’s. As it is, we have a self-serving study that documents that if you save money each year, you are likely to end up with more money than if you don’t.

And a news release that compares two completely incomparable figures â€" the change in stock prices and the change in balance in an investment account that gets constant contributions â€" to falsely imply that 401(k) plans have been outstanding performers.