Data & Research May 13, 2009

Participants Still Kept on in Face of Recession

Even in the face of a major economic downturn, 401(k) participants still kept on keeping on in 2008, according to a Hewitt Associates study.
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But that doesn’t mean participants have blithely let the economy’s slide go by without any reaction; Hewitt said employee investments in equity fund allocations were at record lows last year.

A Hewitt news release about its annual Universe Benchmarks study, which examines the saving and investment behaviors of more than 2.7 million employees eligible for 401(k) plans, showed that the median rate of return during 2008 was -28.3%. The average 401(k) balance dropped from $79,600 in 2007 to $57,200 at the end of 2008, while 43% lost 30% or more of their savings. Only 11% of employees were able to break even or see a gain in their 401(k) portfolios.

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Despite these losses, workers continued to save. Hewitt’s research shows that 74% of employees participated in their 401(k) plan in 2008 with the average deferral rate dropping only marginally, from 7.7% in 2007 to 7.4 % in 2008.

Saving More?

In fact, Hewitt said, more employees increased their savings rate last year (15.4%) than decreased it (14.9 %). Just 4.8% pulled their purse strings tight and stopped contributing to their 401(k) plan altogether in 2008.

“Whether it’s faith in the 401(k) system, inertia, or both, most employees continued to save for retirement amid the tightening economy,” said Pamela Hess, director of retirement research at Hewitt Associates, in the release. “But, because the losses workers have sustained are so extraordinary, they’ll need to be much more proactive about saving to build their nest egg back up to pre-recession levels. Now, more than ever, workers should make sure they’re investing in the right mix of funds, rebalancing periodically and getting financial help and advice to make sure they’re taking all the right steps to meet their long-term goals.”

Hewitt’s study showed a slight increase in the number of workers who made any trade in their 401(k) plan last year: 19.6% in 2008 versus 18.7% in 2007.

The volume of money they transferred was much higher. Nine of the 10 most active trading days were the days after a large downturn in the market, or days with an average return of -4%. Employees’ average equity exposure dropped to just 59% in 2008—which is an all-time low since Hewitt began tracking it in 1997. Stable-value funds experienced an 11% increase in asset allocation in 2008.

The Hewitt data also found:

  • Eighteen percent of employees took a hardship withdrawal from their 401(k) plan in 2008.
  • The number of employees taking out 401(k) loans (23.1%) in 2008 remained similar to levels in prior years.
  • Half of participants now invest in pre-mixed funds, up from 40% in 2005. Younger workers are much more likely to use them: 64% of 20- to 29-year-olds invested in these funds, compared to just 43% of workers in their 50s and 39% of those ages 60 or older.
  • On average, the allocation to company stock among workers who have access to these funds ended the year at 14.9%, down 7.4% from the previous year. Further, only 9% of employees held half or more of their 401(k) plan assets in their employer’s stock, down from 16% in 2007 and 27% in 2004.
  • The number of employees holding just one or two asset classes in their 401(k) plans decreased to 24% in 2008 from 29% in 2005 and 34% in 2003. On average, workers spread their investments across 4.3 asset classes in 2008.
Data & Research May 13, 2009

Participants More Interested in Education, Fidelity Says

With the economy still uncertain and continued market volatility, Fidelity Investments said it is seeing higher levels of worker engagement in retirement plans.
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Fidelity’s data, based on more than 17,500 of its corporate defined contribution plans and 11.3 million participants, show that nearly half of all plan participants contacted Fidelity about their workplace savings plans during the first three months of 2009. Additionally, according to a news release, Fidelity provided nearly 4,000 financial seminars attended by nearly 208,000 workers representing over 920 employers across the country during the first quarter.

Fidelity is also seeing an increased demand for live seminars held over the Internet, the company said.

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Additionally, Fidelity said many participants are also using its retirement planning tools to help them better understand their risk tolerance and plan for retirement. In the first quarter alone, 236,000 participants used one of Fidelity’s planning tools either on their own or with the assistance of a Fidelity representative on the phone or via a live Web chat.

Participants Continue Saving

Overall, nearly half of the participants who attended a seminar or experienced a planning session with a representative took some action either by rebalancing their account or increasing their contribution to their workplace savings plan.

Data on Fidelity clients’ defined contribution plan participants show that 97% of active participants continued to make contributions in the first quarter. On average, workers contributed $1,700 of their pre-tax income in their workplace savings accounts in the first quarter, down slightly year-over-year ($1,860). With a majority of employers also continuing to contribute to their employees’ workplace savings accounts, according to a Fidelity press release, total contributions totaled $2,780 on average in the first quarter, a slight decrease from $3,080 in the first quarter of 2008.

Exchange levels in the first quarter were down from the fourth quarter of 2008 and also from year-over-year levels. About 5.2% of participants in the first quarter made an exchange, down from 6.1% in the fourth quarter of 2008 and 6.2% during the first quarter of 2008.

Twenty-five percent of new contribution dollars are being invested in blended options, a vast majority of which are lifecycle options, Fidelity said. More than 51% of new contributions to 401(k) plans are going into equities, including domestic, international, and company stock. In total, participants are directing nearly 69% of their new contribution dollars into equities (domestic, international, company stock, and the equity portion of blended options).

The remaining quarter of new contributions are being invested in more conservative short-term, stable value, or fixed-income investments, up slightly from the previous quarter.

In addition, auto-enrollment has been adopted by more than 16% of plans, led by larger plans, covering nearly 50% of the participant base. More than 50% of plans with 25,000 participants or more have adopted auto-enrollment.

Employers also increased their adoption of Roth 401(k) in the first quarter to 14.7% of plans at the end of March, up from 13.2% at the end of 2008.

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