The bear market of 2008-09 and the Great Recession that sparked it caused significant changes in the U.S. retirement system but taught valuable lessons that are apparent at the 10th anniversary of the market bottom and should not be forgotten.
The recession once again showed that the health of the nation's private retirement system is dependent on the health of the U.S. economy. The total number of private-sector retirement plans — defined benefit and defined contribution — peaked at 735,651 in 2000 and declined to 679,093 after the 2000-01 recession. It climbed back to 717,532 in 2008 before plunging again after the Great Recession, bottoming at 676,622 in 2012. The decline was likely caused both by company failures and companies abandoning their retirement plans as unaffordable. By 2016, the last year for which figures are available from the Department of Labor, the total number of plans had climbed back to 702,540.
Defined benefit plans, in particular, were hurt; the Great Recession accelerated a decline that began after 1983, when the number of such plans peaked at 175,143. From 47,137 in 2009, the number of DB plans dropped to 43,601 in 2012. However, DB plans are a hardy plant and their numbers had grown to 46,300 by 2016.
Another lesson is that what the capital markets take away in a crash, they can give back in a recovery. Between March 6, 2009, and March 8, 2019, the total annualized return on the S&P 500 was 17.32% and on the Bloomberg Barclays U.S. Aggregate Bond index it was 3.72%, with these returns powering much of the recovery of the value of retirement assets.
Total defined benefit and defined contribution assets (private and public), which stood at $6.12 trillion at the end of 2007, plunged to $5.1 trillion at the bottom of the bear market in March 2009 then climbed to $9.242 trillion at the end of 2018 from market returns and new contributions.
After declining by 20.7% from the end of 2007 to 2009, public employee defined benefit plan assets increased by 68.8% through 2018 to $4.178 trillion. Some of that rebound was probably due to state and local governments stepping up contributions to improve the funded status of their plans, according to Pensions & Investments Research Center data.
Corporate DB plan assets declined by 16.3% during the bear market and have since climbed by 53% to $1.97 trillion. The size of the corporate rebound was likely reduced by companies using plan assets to move liabilities off their balance sheets to insurance companies.
The assets of corporate defined contribution plans declined by 11.4% during the bear market and have rebounded by 232% to $2.76 trillion since March 2009 as a result of market appreciation and contributions by plan participants. Public employee DC assets declined by 13.1% from the end of 2007 to March 2009 but climbed by 236% to $330 billion through the end of 2018.
While the S&P 500 was plunging from a high of 1,565 on Oct. 9, 2007, to a low of 676.53 on March 9, 2009, retirement plan assets did not decline nearly as much, showing the value of diversification. The retirement plan assets apparently were buoyed by their fixed-income and cash positions, especially the capital gains in bond portfolios as 30-year Treasury rates dropped to 3.64% on March 1, 2009, from 5.2% on June 1, 2007.
Another lesson from the bear market is that a combination of inertia and/or investment wisdom prevented defined contribution plan participants from halting contributions to their accounts. At Vanguard Group, average and median account balances continued to increase through the bear market. The average account balance increased from $56,030 in 2008 to $69,084 in 2009 and $79,007 in 2010. Only in 2011 was there a dip in the average account balance to $78,276. By 2017, the average account balance had reached $103,866. The median account balance, though smaller, followed a similar trajectory from 2008 through 2011.
Fidelity Investments' 401(k) participants likewise continued to add to their funds through the bear market; the average account balance increased to $69,700 in 2010 from $49,000 in 2008 to $62,600 in 2009. But it did drop slightly in 2011.
Employer-sponsored investment education seems to be paying off as DC plan participants appear to realize that they should not panic when a recession strikes and brings about a bear market. The economy and the markets both will recover and return to good health.