Despite these monumental losses, workers continued to save. Hewitt’s research shows that three-quarters (74 percent) of employees participated in their 401(k) plan in 2008, which is consistent with previous years’ findings. The average 401(k) contribution rate dropped only marginally, from 7.7 percent in 2007 to 7.4 percent in 2008. In fact, more employees increased their savings rate last year (15.4 percent) than decreased it (14.9 percent). Just 5 percent (4.8 percent) 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," says Pamela Hess, director of retirement research at Hewitt Associates. "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."
Some Employees Reacting to Market Swings
Still, some workers are reacting to the market downfall by moving 401(k) assets into less risky investment funds in an attempt to time the market. 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 percent in 2008 versus 18.7 percent in 2007. And the volume of money they transferred was much higher. Nine of the ten most active trading days were the day after a large downturn in the market, or days with an average return of negative 4 percent. Employees’ average equity exposure dropped to just 59 percent in 2008 - which is an all-time low since Hewitt began tracking it in 1997. Stable-value funds - which are considered less risky investments - experienced an 11 percent increase in asset allocation in 2008.
"It’s understandable that some employees are uneasy about the declining value of their 401(k) accounts," says Hess. "However, workers who impulsively transfer assets to more conservative funds during market slumps may hurt their ability to save enough for retirement since most are unlikely to reallocate their investments when the market rebounds. Instead of trying to time the market, employees should look at the fund mix in their 401(k) plans to make sure they have a good balance of high-, medium- and low-risk investments."
Other Key Findings
- 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 percent) in 2008 remained similar to levels in prior years.
- Half of participants now invest in pre-mixed funds - which include target-date and target-maturity funds - when they are available, up from 40 percent in 2005. Younger workers are much more likely to use them: 64 percent of 20 to 29 year olds invested in these funds, compared to just 43 percent of workers in their 50s and 39 percent of those ages 60 or over.
- On average, the allocation to company stock among workers who have access to these funds ended the year at 14.9 percent, down 7.4 percent from the previous year. Further, only 9 percent of employees held half or more of their 401(k) plan assets in their employer’s stock, down from 16 percent in 2007 and 27 percent in 2004.
- The number of employees holding just one or two asset classes in their 401(k) plans decreased to 24 percent in 2008 from 29 percent in 2005 and 34 percent in 2003. On average, workers spread their investments across 4.3 asset classes in 2008.
