State of the 401(k): It’s not as bad as you think
Posted on 12 February 2009
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/money/state-of-the-401k-its-not-as-bad-as-you-think
It might be denial, or it might be courage. It might even be foolishness. Whatever the reason, investors appear to be standing by their 401(k) accounts through the worst bear market in decades.
Survey data reflecting behavior of millions of workplace retirement investors point to remarkably steadfast decision-making last year. People kept on contributing to their accounts even through the grim fourth quarter, although many made dramatic adjustments to their mix of equity and fixed income holdings.
There were several other encouraging trends in retirement investing during 2008, including dramatic growth in the use of automatic investing options and diversification away from company stock in plans.
A “State of the 401(k)” report from Fidelity Investments shows that the average workplace savings account balance dropped 27 percent compared with 2007, to an average of $50,200. Despite those grim numbers, investors seemed ready to gut it out—or, they were just scared to peek inside their accounts. Take your pick, but here are the trends:
—Contributions held steady. Contributions by holders of workplace retirement accounts stayed near historic levels, according to Fidelity. Participants contributed an average of $5,600 in pre-tax earnings, which was “slightly higher” than 2007 levels. Even during the ultra-volatile fourth quarter, 96 percent of plan participants continued their pre-tax payroll contributions.
Amazingly, Fidelity saw a net transfer out of equities in 2008 of just 2 percent, according to Scott David, the company’s president of workplace investing. “Very few people stopped contributing,” David said. “They’re reallocating assets and some are taking loans and hardship withdrawals, but we’re not seeing anything out of line with previous years. It’s not a mass panic.”
—Investing became more automatic. One of the most positive trends among the market wreckage was the dramatic increase in the adoption of automatic investment options by employers. These include auto-enrollment for new employees, and using lifecycle funds as the default investment in plans. Fidelity reports that over 60 percent of plans were using lifecycle funds as a default at the end of 2008, up from 38 percent a year earlier. Auto enrollment rose to 16 percent from less than 11 percent in 2007.
Auto-enrollment is critical because far too many Americans just don’t save at work. The Employee Benefit Research Institute (EBRI) reports that just 44 percent of American workers participate in a retirement saving plan.
Lifecycle—or target date funds—offer a great way to put investment decision-making on auto-pilot. The funds hold an investment mix targeted to the year you plan to retire, and automatically reduce the share of equities to reduce your exposure to stocks as retirement approaches. Research by EBRI shows that if all 401(k) participants had been in target date funds during last year’s meltdown, many of the investors within 10 years of retirement would have seen their losses trimmed by at least 20 percent.
—Diversification from company stock continued. Having a large portion of your account tied up in your own employer’s stock is a form of double risk exposure. If the company performs poorly, you risk losing your job as well as the value of the stock (See: Enron). So it’s good news that Fidelity reports a continuing downward trend in the amount of company stock held in plans—about 10 percent of overall assets in workplace savings at the end of 2008, down from over 20 percent in early 2000.
Fidelity’s David says a growing number of companies are pulling away from requiring employees to invest in company stock due to the risk involved. “They have fiduciary responsibility for their plans and that means they need to put employee interests first,” he says.
Not all the trends are positive, of course. In particular, two trends show just how much financial stress investors are feeling:
—There was an unprecedented shift out of equities by older investors. Older investors were seeking to preserve capital they’re likely to need soon. Fidelity reports that investors in their 60s cut the percentage of equities in their portfolios to 46 percent at the end of 2008—down from 61 percent in 2007.
Withdrawals and loan rates are rising. Hewitt Associates reported an uptick in the number of employees tapping into their 401(k) plans last year—six percent compared with just over 5 percent in 2007. The increase was due to a 16 percent increase in hardship withdrawals.
