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Retirement plans take hit in economic downturn, increasing worries for many aging workers

By LEIGH STROPE

The Associated Press

7/30/01 1:16 AM

WASHINGTON (AP) -- Retiree Paul Ferraro got out of the stock market before it got him.

"I'm sitting here while Rome is burning, and laughing," said Ferraro, 60, of Alexandria, Va.

Ferraro, who retired from the Labor Department in 1996, did get nicked a little, though. He lost about $4,000 last fall in various funds that were invested in the stock market, and "saw the writing on the wall." He pulled everything out in favor of lower-risk money market accounts.

Others weren't so fortunate.

For the first time in their 20-year history, 401(k) retirement plans lost money last year. The average balance dropped to $41,919 from $46,740 in 1999, according to Cerulli Associates, a benefits consulting firm in Boston. Overall, assets fell $72 billion in 2000 to $1.77 trillion. There were 327,364 plans serving 42.1 million participants.

Ferraro's wife Laura, 53, who still works, lost "a lot" in her investment portfolio and retirement plans. She can't bear to open her statements to find out exactly how much. But she is still several years from retirement and hopes to recoup the losses.

The stock market fall, combined with increasing debt, has meant the largest absolute decline in household wealth since World War II, even after correcting for inflation, said Christian Weller, an economist with the Economic Policy Institute in Washington.

Household wealth dropped $2.3 trillion, or 8 percent, between the end of 1999 and the end of 2000.

This comes at a time when a White House commission to overhaul Social Security is developing a plan to let young workers invest some of their payroll taxes in private accounts. Proponents argue that market volatility is minimal during a long holding period.

The annual return on stocks ranges from a worst-year drop of 35 percent to a best-year increase of 47 percent. But in any 35-year period in the past 128 years, the average annual rate of return for an all-stock portfolio was 2.7 percent to 6.4 percent, according to a study by the National Center for Policy Analysis.

"Stock are a lot less risky than most people think," said Andrew J. Rettenmaier, an author of the study.

That's not much comfort to workers nearing retirement. They have two choices to build back their savings: save more or hope the market recovers soon. Some experts say immediate prospects for either are dim.

Households and companies are overburdened by debt, which hurts the outlook for saving and the stock market, Weller said.

"As households try to pay off the debt, they're not saving enough. They're also not spending enough," he said. "If they're not spending enough, companies are not investing enough. And that means the economy is caught in this slow growth quagmire we're in right now."

Americans' personal saving rate peaked at 10.9 percent in 1982. But in 1999, it plummeted to 2.2 percent -- an annual rate not seen since the Great Depression, according to a General Accounting Office report last month. Economists estimate the personal savings rate to be zero or negative for 2000.

For Carlos Uzeta, 70, the stock market downturn means he won't be able to retire anytime soon from his engineering job at a defense contractor in El Paso, Texas. He has lost about $30,000.

Uzeta had hoped to retire, move with his wife into a smaller home and live on his 401(k) savings and their Social Security benefits.

"We would have had a pretty good nest egg," said Uzeta, whose wife does not work.

He had invested in his 401(k) aggressively -- and nearly all in technology stocks, which have been the hardest hit. Investment advisers tell people very close to retiring to keep only about 20 percent in equity markets.

"Engineers are not the best for investing," Uzeta said. "It turns out to be a personal judgment call."

Others face an even bleaker outlook. More than half of people working lack a pension or retirement plan, the GAO report said. About one-fourth of workers who are eligible don't participate.

In addition, retirement incentives passed by Congress this year raising contribution limits for individual retirement accounts and 401(k) plans will have little benefit for many Americans who can't afford to contribute that much or don't participate at all.

Uzeta said he will work as long as his health lets him, and hopes for an economic rebound.

"I'm just leaving it to the economy now," he said. "We'll just resign ourselves to whatever we have to."

Copyright 2001 Associated Press. All rights reserved.

-- (M@rket.trends), July 30, 2001

Answers

What happened during Black Monday in Oct 1987? Did people actually find their 401Ks had increased in funds? I didn't. In 1987 I lost 50% of my funds; last year I lost about 20%. Anyone else find this article bs?

-- Maria (anon@ymous.com), July 30, 2001.