401(k)s are recovering, but without much joy

My 401(k) statement may look a little better than it did at the end of last year, but I'm not feeling any kind of "wealth effect."

Sure, the S&P 500 index is up 21 percent in 2009. If such a spike happened in any other year, I and investors like me would be ecstatic, running with the bulls on Wall Street. Why isn't my "investor sentiment" feeling the love?

Because the stock market panic last fall that produced a 38 percent decline in the S&P 500 index for 2008 reflected a global financial crisis that toppled huge, ill-understood financial giants and spawned an ongoing debate over how to minimize the risk of its happening again.

Even so, unlike during the Great Depression, in which an entire generation soured on stocks, today's investors have continued to stash money in their retirement accounts. However, many no longer have blind faith in the wealth-generating engineers who were entrusted with their hard-earned income.

Only about half of Americans who work for employers that provide 401(k) or other employee-contribution plans actually participate in them. The Obama administration and lawmakers would like to see more people save for retirement, but a double-digit unemployment rate and pressure on household budgets are deterrents to that.

Various surveys have shown that those who do participate in a 401(k) plan kept doing so during 2008, although with smaller contributions, on average. A Vanguard Group Inc. report examined the actions of more than three million participants in more than 2,200 defined-contribution plans. On average, Vanguard found that participants deferred 7 percent of their income into their 401(k)s in 2008 compared with 7.3 percent in 2007.

For families, the paper losses in their retirement accounts were unnerving. The Employee Benefit Research Institute estimated that the median balance for a defined-contribution plan was $26,578 as of mid-June, down 16.4 percent from the end of 2007.

I asked Chip Addis, president of Addis & Hill Inc., a Wayne financial-planning firm, whether he thought this broad market turmoil and loss of wealth were any different from the carnage caused by the technology-stock bubble that burst earlier this decade.

He said his conversations with investors indicated a big difference. The dot-com bubble and the terror attacks in 2001 were specific events, giving investors a way to "rationalize" their losses, he said.

"This time, it was all so confusing. It's still confusing for people," Addis said.

Worse, it was confusing to the financial industry that created and sold the complex derivatives that led to the massive global rescue by so many governments.

"The financial-services industry has done a poor job in dealing with issues of risk management, and of really educating the general public that these catastrophes can happen," Addis said.

Looking ahead, investors need to watch how the various financial-oversight, health-care, and climate-change bills play out in Washington. Carrying massive amounts of debt, the federal government faces a huge hurdle in trying to sell evermore Treasury securities to nervous global investors in 2010. And while interest rates and inflation are low now, how long can they remain so?

It's no wonder Addis said investors were still afraid. The United States may be more than a year removed from the disastrous events of September 2008, but the memory of those losses remains very fresh.

Contact Mike Armstrong at 215-854-2980 or marmstrong@phillynews.com.