The analysis of 2.7 million U.S. employees indicates that the average 401(k) balance has dropped 14% in 2008 to $68,000, down from $79,000 in 2007, according to a Hewitt news release. In the past two months, on average, participants have lost nearly 18% of their 401(k) plans savings.
However, savings rates have only dropped slightly, from 8% in 2007 to 7.8% in 2008, and only 4% of participants have dropped their employee deferrals altogether, according to Hewitt.
Shifting Investment Mix
While continuing to save, the Hewitt data show, participants are taking less risk with their savings. The amount of 401(k) assets invested in equities is at an all-time low (53.8% compared with 68.1% a year ago), Hewitt said. The number of employees making trades has risen slightly (19.3% verse 18.7% in 2007), but the amount of assets being traded has risen significantly (5.3% so far in 2008 verse 3.5% in 2007).
In October alone, 1.25% of participants’ balances were traded—almost three times the historical average (see Participant Transfer Activity Significantly Higher in October).
“The concerning behavior we are seeing…is some evidence of knee-jerk investment decisions, with a significant increase in the number of investment transfers immediately after the market drops. In the vast majority of cases, employees who impulsively respond to the fluctuations of the market can dramatically reduce their overall retirement savings, as employees are unlikely to readjust their investment portfolio when the market makes a turn for the better,” said Pamela Hess, director of retirement research at Hewitt Associates, in the news release.
Tapping into Retirement Savings
The Hewitt analysis reveals an uptick in the number of participants tapping into their 401(k) accounts. More than 6% of participants withdrew money from their 401(k)s in 2008, up from 5.4% in 2007. This was due to a surge in hardship withdrawals (16%), Hewitt said.
Some firms in industries especially hard-hit by the economy have seen hardship withdrawals by an excess of 10% of their population—nearly nine times more than the average 401(k) plan.
However, the analysis found loan activity has remained constant, with 22% of participants having a loan outstanding.