Average 401(k) plan balances rose significantly in 2009, primarily due to strong market returns. The median rate of return was 24.3 percent—a stark contrast to 2008 when the median return was negative 28.3 percent. As a result, average 401(k) plan balances rose from $57,150 in 2008 to $70,970 in 2009. However, these average balances remain 11 percent lower than they were in 2007 before the recession ($79,570). Market appreciation also boosted the amount of equity employees held in their 401(k) plans, from 59 percent in 2008 to 67 percent in 2009.
“While it’s encouraging that most workers 'stayed the course' throughout the market’s roller coaster fluctuations, most did so simply because they were disengaged with the retirement saving process or too paralyzed with fear and confusion to touch their 401(k) plans,” says Pamela Hess, Hewitt’s director of retirement research. “If employees continue to ignore their 401(k) plans, they’re hurting themselves by letting the market dictate their retirement strategy. This works against employees in both market ups and downs and can lead to poor returns. Employees have to make retirement planning a priority and take more proactive steps to manage their plans—including rebalancing their portfolios, gradually increasing their contribution rates and paying attention to fees.”
Investments in Premixed Portfolios Increase
Hewitt’s research also reveals that premixed portfolios, including target-date and target-risk funds, now make up the largest portion of employees’ asset allocations. In 2009, employees held about a quarter (24.7 percent) of their assets in a premixed fund—up nearly 2 percent from 2008 and 8 percent from 2007—followed by GIC/stable-value funds (17.1 percent) and large U.S. equity funds (15.3 percent). When available in the plan, about half of employees (51.2 percent) invested in a premixed portfolio. Among the workers that made a trade in 2009, about a quarter (25.2 percent) directed their assets into a premixed portfolio, and 26.6 percent new contributions were directed to this asset class.
High concentrations in premixed funds can also be attributed to increases in the number of employers using target-date funds as the investment default under automatic enrollment. Hewitt research shows that among the 58 percent of employers that automatically enrolled their employees into their 401(k) plan, the majority (69 percent) defaulted them into a target-date fund.
“Target-date funds came under a significant amount of fire for their performance during the financial downfall in 2008,” adds Hess. “However, these funds remain great options for employees that don’t have the time, interest or knowledge to make informed decisions about their 401(k) plan, and don’t have unique needs that would warrant a more customized allocation. They take the guesswork out of investing and enable workers to be well-diversified without requiring them to
proactively rebalance their portfolios.”
Other Key Findings
- Nearly three in ten (28.2 percent) participants do not contribute enough to their 401(k) to receive their full employer match, which is consistent with 2008 levels.
- The average allocation to company stock among workers who have access to these funds was 18.6 percent in 2009, up 3.7 percentage points from the previous year. The percentage of employees who held half or more of their 401(k) plan assets in their employer’s stock also rose, from 9.4 percent in 2008 to 12.7 percent in 2009. These increases are likely due to high returns in some employer stocks versus participant transfers. Among all plans with company stock funds, only 9 percent of plans saw inflows into company stock funds.
- During 2009, 7.1 percent of participants took a withdrawal - which was the highest level since 2002. More than a quarter (25.6 percent) of employees had a loan outstanding at the end of 2009, up slightly from 2008 (23.1 percent).
- By the end of 2009, 7.4 percent of the active participants elected to invest in a Roth 401(k) when it was available, down slightly from 7.9 percent in 2008.
