Dallas, TX (September 23, 2009) – After the decline of the stock market in the fall of 2008, many people felt that holding on to their money and having it retain its value was better than continuing to contribute money to a money-losing investment. A new report by the National Center for Policy Analysis takes a look at some of the common reasons people halt contributions or withdraw funds, and explains why those reasons don't hold water.
One common reason people give as to why they stop contributing to their 401(k) accounts is that, "If the market dips further, I'll lose money." NCPA Senior Policy Analyst, Pamela Villarreal, agrees this is true, but says it may not be as bad as it sounds.
"Unless a worker cashes out his or her 401(k) account, there is usually plenty of time to recoup losses," Villarreal said. "For example, if an employee contributes $100 for 10 shares of a mutual fund at $10 a share, and his company matches the employee's $100 contribution, if the fund drops 50 percent to $5 a share two weeks later, half of the $200 contribution is lost. However, because the employee contributed only $100 to begin with, he is no worse off."
Another common reason people say they're suspending 401(k) contributions is because, "My employer suspended the match."
"Currently, less than 2 percent of employers have suspended their matching contributions," Villarreal said. "Meanwhile, taxes will eat away at the employee's $100 if not invested."
And finally, people claim, "I'm better off putting my money under the mattress until my 401(k) account improves."
(See figure II in the NCPA report to find out how much a worker would have earned or lost if they stopped contributing to their 401(k) account and simply kept their money under a mattress).
The Employee Benefit Research Institute (EBRI) found that the average balance in 401(k) accounts with the fewest years (6-10 years) more than tripled between January 2000 and January 2009. Long-established accounts (21-30 years) gained at least 29 percent during the last period.
"Suspending 401(k) contributions or hiding money under a mattress would do more damage to your retirement savings than if you left it in an account," Villarreal said. "The market has always recovered after a recession, so the best strategy for any saver is to keep investing."
To see the full NCPA report with charts and figures, log on to http://www.ncpathinktank.org/pub/ba677. To arrange an interview with Pamela Villarreal, please contact Leah Gipson.