People age 55 and older face much bigger challenges in making up the 401(k) account balances they've lost over the last 18 months than do those under 30 and may need to delay retirement if they can't significantly increase contributions, says a new report from a leading global benefits consultant.

Norwood, Mass.-based Mercer came up with those conclusions after analyzing its defined-contribution participant data for those two groups and found that since the end of 2007 through April 30, 2009, participants under 30 saw their accounts gain 24% while those 55 and over lost an average 16%.

The difference can be attributed to the fact that younger participants with smaller balances can more quickly recover their losses through new contributions and potentially a more aggressive investment strategy, the report says. In contrast, near retirees face a huge challenge in accumulating adequate savings for retirement in the midst of recent economic volatility.

"The overall improvement in market conditions has certainly helped account balances to start heading in the right direction," says Eric Levy, business leader of Mercer's retirement outsourcing business.  "But, near retirees do not have time on their side. Based on our data it is evident that these participants are not adjusting their portfolios as quickly to capture the recent market upswing as they were to move into more conservative investments in late 2008."

In fact, when Mercer compared the portfolio diversification of those 55 and over in April of 2008 and 2009, money put into capital preservation vehicles has gone from 30% to 39% of assets compared to 22% for those under age 30.

People over 55 would need annual returns of 13.64% in the next two years, 5.44% in the next five years or 2.72% over the next 10 years to recoup the average investment losses those in this group have suffered since January 1, 2008, Mercer says.

Because the level of investment returns needed for a quick recovery may be difficult to achieve, older participants may need to either substantially increase contributions or significantly delay retirement, the firm maintains. However participants over age 55 have, on average, decreased their pretax contributions from 9.2% at the end of 2007 to 8.8% in April 2009. To recoup investment losses through additional contributions instead of higher investment returns, participants over age 55 would have to up their annual contributions to 24.5% over two years, 15.4% over five years or 12.3% over 10 years, Mercer says.

The ability of those nearing retirement to adequately save for retirement has important ramifications for both participants and plan sponsors," Levy says.  "Beyond simple savings versus needed income, en masse postponement of retirement for the vast baby-boom generation raises workforce planning issues for plan sponsors that will most likely have to be addressed sooner rather than later."

Other key findings from Mercer's participant data through April 2009:

When looking at the entire participant base, more participants are increasing their contribution rates versus decreasing, a trend Mercer has seen every month in 2009 except February.