A new look at retirement trends by the human resources consulting firm Hewitt Associates shows that both inertia and strategic mistakes take a toll when it comes to planning for a secure retirement. Neither the market losses of 2008 nor the robust rally of 2009 have motivated workers to make their 401(k) plans their top priority.
Hewitt's annual study of nearly 3 million employees across 120 large-sized companies reveals that despite the market volatility, only 16% of employees made any sort of fund transfer in 2009, down more than 3%age points from 2008.
Average 401(k) plan balances rose significantly in 2009, primarily due to strong market returns. The median rate of return was 24%, after falling 28% in 2008. As a result, average 401(k) plan balances rose from $57,150 in 2008 to $70,970 in 2009. These average balances, however, remain 11% lower than they were in 2007 before the recession. Market appreciation also boosted the portion of stocks employees held in their 401(k) plans from 59% in 2008 to 67% in 2009.
"While it's encouraging that most workers stayed the course, 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."
Company Matches: Not only are many Americans not taking time to scrutinize asset allocations, they are intentionally shortchanging themselves. About 28% of participants don't contribute enough to their 401(k)s to receive the maximum amount of matching funds from their employers.
The finding is surprising given the hue and cry that erupted in recent weeks as companies such as American Express, FedEx and Starbucks temporarily suspended matching programs.
"It was interesting to watch employee reactions to the match suspension," Hess says. "We had expected some really serious impacts to the savings rates, but it didn't change things as much as we thought."
Although frugality may be at the root of employees' decisions to contribute less, the long-term impact of losing added returns can add up to thousands over the course of a career.
"It's the younger workers and those who have lower incomes who are less likely to take advantage of that match," Hess says. "Getting a 25-year-old to contribute to that match or beyond at an early age is tremendously important, even more important than for someone who is closer to retirement."
Rebalancing: Hess says the steady adoption of target-date funds can help counter the lack of regular rebalancing.
Hewitt's research shows that premixed portfolios, including target-date and target-risk funds, now make up the largest portion of employees' asset allocations. In 2009, employees held 24.7% of their assets in a premixed fund — up 8% from 2007 — followed by stable-value funds with 17% and U.S. large-cap stock funds at 15%. When available, about half of employees invested in a premixed portfolio.
Among the workers that made a trade in 2009, 25% directed their assets into a premixed portfolio, and 27% of new contributions were directed to this asset class.
These high concentrations in premixed funds can be attributed to increases in the number of employers using target-date funds as the investment default under automatic enrollment, according to Hewitt. Its research shows that among the 58% of employers that automatically enrolled their employees in their 401(k) plans, 69% assigned them a target-date fund.
"If you look at people who use target-date funds, they had a great year — better than most workers — because they are actually rebalancing," Hess says. "When we look at people outside target-date funds, there has been very little activity. There has been very little rebalancing, so the returns of that population over the past year-and-a-half are much lower because their equity allocation is moving with the markets."
Withdrawals: Despite persistent guidance not to do so, an increasing number of employees are pulling money out of their retirement accounts.
During 2009, 7.1% of participants withdrew from their retirement plans, the highest level since 2002. More than a quarter of employees had a loan outstanding at the end of 2009.
"A concern we have with our younger generation is the likelihood of them cashing out," Hess says. "We are spenders by nature, not savers and often the focus is on near-term wants versus long term needs."