401(k) losses: Older investors' retirement funds hit hard

— -- Older Americans are watching their retirement savings evaporate as the economy slumps and the stock market falters. John Hansen, 54, has lost 35% to 40% of his 401(k) savings and, like many close to retirement, says he has few options.

A middle manager at a company in Cohasset, Minn., Hansen planned to retire at 591/2 but now doubts his savings will rebound fast enough.

"I've run out of time," he says. "I'm going to have to work until I'm 70."

Today, 401(k) plans are the major source of retirement income for millions of Americans. The bear market underscores their risks.

"We're seeing that those funds were never guaranteed, that the stock market can go down and stay down and that the fees can erode earnings and contributions so that people end up with less than they put in," says Teresa Ghilarducci, professor of economics at the New School for Social Research in New York.

Recently, General Motors said it would suspend its matching contribution to the 401(k) plan for its salaried employees. "All the risks and responsibilities are on the individuals in 401(k) plans," says Karen Friedman, policy director at the Pension Rights Center, an advocacy group.

Among other 401(k) dilemmas:

• Workers often don't save enough. Nearly 43% of workers over age 55 have less than $50,000 in savings and investments, according to a survey released last April by the Employee Benefit Research Institute.

In part, the saving rates are so low because many failed to start investing in their retirement plan at an early age. "I didn't really start doing anything with my 401(k) until I was in my early 50s," says Dan Kaley, 59, who lives in Pittsburgh. He decided to catch up quickly by heavily investing in stocks. Now his retirement investments have nose-dived.

"My plan has always been to retire at 62 or 63," Kaley says. "Now I have no idea. Maybe I will work until my late 60s."

Other workers say they just can't afford to save much more for retirement. The most common reason: They don't have enough money left after paying their bills, according to a recent AARP survey of workers age 45 and older.

• Workers cash out retirement savings. Young workers often cash out their 401(k) plans when they change jobs, thinking that they are young enough to make up for the withdrawals later on. But cashing out retirement accounts not only can trigger taxes and penalties, it also imperils their financial futures.

And some older workers have raided their retirement accounts to pay bills, retirement administrators say.

Financial security also has been hitting a roadblock because many workers are no longer adding money to their retirement plans. In the past 12 months, 20% of workers 45 and older stopped putting any cash into their 401(k)s, IRAs or other retirement accounts, according to AARP.

• Stock risks. During a bull market many workers were eager to invest part of their retirement savings in stock and stock mutual funds. But when older workers' investments are hit by a bear market, their financial futures change. If they don't have a pension plan and are relying only on a 401(k), the bear market will cut their retirement income by 13.4% to 17.7%, according to analysis by Jack VanDerhei, research director of the Employee Benefit Research Institute.

Those who have put all of their investments into stocks face a much worse situation. For example, Kaley has heavily invested his 401(k) in stocks. "I felt like I had to be aggressive because I started out so late," he says. His retirement savings have now fallen more than 60%. In fact, on average at least half of those within 10 years of retirement have at least 20% more stocks in their 401(k) portfolios than would be the case if they had invested in target date funds, VanDerhei says.

• Inflation risk. When the stock market plummets, some people get so worried that they can't sleep at night. For relief, they tend to switch their retirement money out of stocks and into Treasuries, fixed-income funds and CDs. More than half of employers surveyed, 53%, said that their employees are changing their investment mix to move out of stocks, according to a recent survey of 248 large employers by Watson Wyatt.

But unless they need the cash fairly soon, moving out of stock investments doesn't give their 401(k) a chance to rebound. "And by putting more money into Treasury and fixed-income funds they have the risk of inflation," which can erode the real value of the income you receive, says Trisha Brambley, president of Resources for Retirement, a consulting firm in Newtown, Pa.

Many older workers have some very difficult retirement decisions to make, especially because no one knows how long it will take for the stock market to climb back up. Since the beginning of the year, the average 401(k) account balance has fallen about 19% for workers over age 55, according to VanDerhei. Those who don't have a pension plan, and can rely only on Social Security and a 401(k) plan, have few options.

"It's a tough situation, because workers are asked to make a number of very unattractive choices," says Christian Weller, a senior fellow at the Center for American Progress.

Among their options:

• Work longer. Alex Dudas, a manufacturing engineer in Torrance Calif., who is 61, says that he will now have to work longer before he can retire because his retirement plans are down about 43%. He estimates that because of the drop in his 401(k) plan as well as in the value of his home, that he has lost about $700,000. "I would have retired between age 65 and 66," he says. Now he expects to be in the workforce for six to seven years longer.

But not everyone has such an option, "unless you can hang onto your job. Losing your job and re-entering the labor market is often very hard for workers 55 and older," Weller says.

Patricia McFarlan, 53, of Oakley, Calif., was laid off from AIG last year and has not found another job. She was planning to retire early, but her 401(k) has dropped more than 30%, partly because she had invested some of her savings in AIG stock, which traded near $130 in 2000. Thursday it closed at $1.63. "This is a scary time," she says.

Many workers close to retirement are coping not just with the collapse of the stock market. Some will find that the faltering economy will also affect their jobs. "When the economy is going into a free fall and unemployment levels are going up, older workers are the first to be fired," Ghilarducci says.

• Spend less. Those who don't want to work longer or don't have that choice can try to consume less and save more.

Ned Bauer, 63, who is a part-time consultant in Crestline, Ohio, says that his and his wife's retirement investments are down about 50%, so they are tightening their belts. "We wanted to buy a home in Arizona near where our youngest daughter lives. That's not possible. And we probably would have bought a new car next year, but we will not now."

Their retirement future:

Despite the problems of 401(k) plans, only about half of Americans have retirement plans through their employers, Weller says. And many companies dropped their traditional pension plans, which guaranteed income for life, in favor of 401(k)s.

Experts are considering some other retirement options. For example, as a short-term solution, Ghilarducci has suggested that Congress should allow workers to trade their 401(k) assets for a Guaranteed Retirement Account, which would include special-issued government bonds paying a guaranteed 3% return, adjusted for inflation.

Still, experts say there are benefits to 401(k) plans. For example, they provide choice and control over investments and portability and access to funds, the American Benefits Council says. The Pension Protection Act has encouraged improvements, such as automatic enrollment. And there has been a proposal to reduce 401(k) fees.

Some experts also say that there is no perfect retirement solution. "Keep in mind that there is nothing that is without risk," says Brambley, who helped implement the first 401(k) plans.

Bauer, from Ohio, remembers the stories his father used to tell about the Great Depression. Near his father's retirement, the S&L where he had saved his money went bankrupt and he lost a significant part of his savings.

"Until recently I thought those kinds of things don't happen anymore," Bauer says. "But sadly, they do."