The year 2009 turned out to be a comparably positive year for 401(k) investors, because the plans showed significantly higher balances in the final quarter and in the year as a whole. In fact, many participants recouped much of their losses from 2008, reports Fidelity Investments.

Average 401(k) account balances closed the year at $64,200, up another 5.7% from the end of the third quarter and up 28% for the year. The median one-year personal rate of return, or PRR (a measure of investment performance during a given period of time), in 2009 was nearly 27%. During the same period, the Standard & Poor’s 500 index had a total return of 26%.

The average deferral rate remained relatively flat for the year at about 8.2%, but the fourth quarter witnessed the continuation of a positive trend of more participants electing to increase their deferral rates than decrease them.

The 2009 analysis is based on the accounts of 11 million participants in the more than 17,000 corporate defined contribution plans managed by Fidelity.

“The good news is that many workers, in spite of the economy, chose to save in their 401(k)s throughout 2009, and as the markets recovered, so did many Americans’ account balances,” says Jim MacDonald, president of workplace investing at Fidelity Investments. “When we took a longer-term view and looked at the past decade, we found that many participants were able to significantly grow their nest egg, despite periods of great market volatility.”

Despite a dreary decade that experienced unprecedented volatility coupled with two of the worst market downturns in history, analysis of plan participants with a 401(k) plan for the past 10 years showed their account balance increased nearly 150% to $163,900 at the end of 2009 from $65,800 at the end of 1999, according to the research.

This increase was thanks to continued participant and employer contributions, dollar cost averaging and market returns. The data also showed that these participants had a median age of 51 years with a deferral rate of 10.4%.

Risk doesn’t always pay off, as many participants discovered who took higher risk with their asset allocation as compared to age-based target retirement date funds. For these individuals, the past ten year period did not result in higher returns.

Analysis found that 65% of participants with 10-year PRRs took higher risk than the corresponding age-based Freedom Fund, which was assigned assuming a retirement age of 65. Of that higher group, nearly seven out of ten (69%) showed a lower return than their age-based funds over the course of the decade.

On a positive note, while asset allocation continues to be one of the greatest challenges for most participants, the findings suggest a shift to a more balanced portfolio. Back in 2000, participants on average funneled over 80% of their new contribution dollars into equities. On the other hand, participants were contributing less than 70% to equities by the end of 2009.

The percentage of participants contributing 100% to equities also sagged considerably during that same period to 19% in 2009 from 47% in 2000. During that time, contributions made to blended funds, which include both age-based target date funds and balanced funds, nearly tripled from 9% in 2000 to 26% in 2009.

Fidelity experts attribute this trend toward diversification to participant education as well as continued employer adoption of target date funds as the default fund. As of the end of 2009, nearly two-thirds (65%) of plan sponsors utilize target date funds as their default investment option.

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