Employees sluggish in maximizing 401(k) plans, study says

Employees’ average 401(k) balances increased 35 percent in 2003 to approximately $64,600, which exceeded 1999 levels for the first time. However, Hewitt’s research shows only slight increases in 401(k) plan participation, contribution rates and rebalancing activity.

“Employees investing in their 401(k) plans profited from a strong market last year, but they still weren’t engaged in the retirement savings process,” said Lori Lucas, director of participant research at Hewitt Associates, in a news release. “Through good markets and bad, most employees continue to leave their plans on autopilot. For a variety of reasons, they’re just reluctant to truly take control of their retirement planning.”

To conduct its study, Hewitt examined the saving and investment behavior of more than 2.5 million employees in 2003.

Participation, contributions

Hewitt’s study shows that 401(k) plan participation rose to nearly 70 percent in 2003 from 68 percent in 2002. Nonetheless, nearly a third of eligible employees (30 percent) still did not participate in their 401(k) program at all. And, on average, only 45 percent of workers ages 20 to 29 participated.

“What’s particularly troubling is the persistently low participation rate among younger workers even when there’s a stronger market,” said Lucas. “This is the toughest group of employees to reach because retirement is such a distant event for them. But with rising retiree health care costs and declining support for traditional pension programs, they are a group that may ultimately need to rely more on their 401(k) savings than their older peers.”

Transfer activity

Consistent with 2002, only one in six employees who contribute to their 401(k) plan made any form of transfer in 2003. Hewitt’s study shows that, on average, employees who participate in their company’s 401(k) plan ended the year with 68 percent in equity investments, a 2 percent increase from 2002, but still down from the Hewitt 401(k) Index high of 74 percent in 2000.

“In many cases, employees don’t actively manage their 401(k) portfolios because they don’t know how to make good investment decisions,” said Lucas. “They feel safer doing nothing and letting their asset allocations be dictated by market movements. But this translates into a subtle form of market timing. As the market peaks, they may have increased exposure to stock investments, and as the market bottoms, they may have less exposure. Employers need to make it clear that long-term investing does not mean simply forgetting about your 401(k) portfolio. That’s a common misperception by employees.”

Diversification, company stock

The number of funds held by employees increased slightly in 2003, as did the percentage of employees holding more than one or two asset classes.

However, Hewitt’s research shows evidence that diversification is still not a top priority for many employees enrolled in 401(k) programs. More than a third of employees’ portfolios were concentrated in just one or two asset classes, and 14 percent of employees had only one asset class represented-typically company stock or GIC/stable value. Employees who are younger and lower-tenured were most likely to have their balances in fixed-income investments.

“Many people stick with what’s safe or what’s familiar in 401(k) plans, regardless of how appropriate an investment it is,” said Lucas. “That’s why it’s not surprising to see 25-year-old employees with 100 percent of their investments in stable value and older employees solely invested in company stock.”

Employees’ commitment to company stock remains significant. On average, employees holding company stock had 41 percent of their balances in that investment, essentially unchanged from 2002. More than one-quarter (27 percent) of employees held 50 percent or more of their 401(k) plan balances in company stock, which may be attributable to years of accumulation of company match and profit sharing.

“What’s particularly sobering is that more than a quarter (30 percent) of workers age 60 or older have the majority of their money in employer stock,” Lucas added. “Whether it’s due to company loyalty, lack of investment knowledge or a desire to ‘swing for the fences’ with their investments, older employees are subjecting their retirement portfolios to considerable risk at a time when retirement is just around the corner.”

Additional findings

Other key findings include:

• About one in five (22 percent) employees active in their company’s 401(k) plan has a total plan balance of less than $5,000.

• More than one-third (37 percent) of employees use lifestyle funds when they are available in 401(k) plans, but few understand or accept the role of this type of fund. Only 13 percent of employees have all of their noncompany stock balances in a single lifestyle fund.

• The average 401(k) plan participant is 43 years old, has 10 years of tenure and earns an annual salary of approximately $59,000.

• In contrast, the average employee who does not participate is younger (average age 39), has a lower annual salary (approximately $36,000), and a lower tenure with the company (average of 5.5 years).

“For many people, 401(k) plans play a critical role in retirement income security, but we see that the majority of workers can’t or won’t spend the time actively managing their 401(k) portfolio,” said Lucas. “Can employers change this behavior? In some cases, most definitely. That’s why communication and education from the employer remain key components of a successful 401(k) program.

“But there will always be those employees who are just not going to make the effort. That’s why it’s also important for employers to find ways to automate 401(k) plans for these disengaged investors,” she added.

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