Human Capital & Careers

Study Shows Workers Sticking with Retirement Plans

Hewitt research — measuring shift away from equities — still shows that saving levels overall have only dipped to 7.8 percent from 8 percent.
Stephen TaubNovember 24, 2008

U.S. employees seem to be resisting the temptation to save less in their retirement accounts, a Hewitt Associates survey shows.

Savings rates have barely dropped, from 8 percent in 2007 to 7.8 percent in 2008, although there is a predictably aggressive shifting of assets from equities to more other investments. What’s more, just 4 percent of employees have terminated their 401(k) plan contributions altogether this year, according to the analysis by Hewitt, a global human resources consulting company.

So, how bad does the survey show 401(k) investors being hit? The analysis of 2.7 million U.S. employees measured the average 401(k) plan balance as falling 14 percent through 2008, to $68,000 from $79,000 in 2007. In the past two months alone, employees on average have lost nearly 18 percent of their 401(k) plan savings. Some have lost more than 30 percent.

“401(k) plan balances are taking an obvious hit in the current market environment, but it’s encouraging to see that most employees are sticking to their long-term investment strategy and not making rash decisions that ultimately could derail their retirement goals,” says Pamela Hess, director of retirement research at Hewitt.

The amount of 401(k) assets held in equities has reached an all-time low: only 53.8 percent of assets on average, compared to 68.1 percent a year ago and down from its high of 74.2 percent in 2000. And while the number of employees making trades has risen slightly — 19.3 percent versus 18.7 percent in 2007 — the amount of 401(k) assets being transferred has been significantly higher. To date, 5.3 percent of employees’ 401(k) savings has been traded, compared to 3.5 percent in 2007. In October 2008 alone, 1.25 percent of employees’ 401(k) balances were traded, almost three times the historical average.

It does seem, however, that many individuals are shifting out of equities after they have fallen precipitously, thus locking in large losses. These savers are also not in position to benefit from a rebound, of course, whenever that time comes.

“In the vast majority of cases, employees who impulsively respond to the fluctuations of the market can dramatically reduce their overall retirement savings, as employees are unlikely to readjust their investment portfolio when the market makes a turn for the better,” says Hess. “Therefore, it’s important to keep in mind that retirement saving is a long-term strategy.”

Certainly, a growing number of employees are tapping into their 401(k) plans, according to the study. More than 6 percent of employees withdrew money from their 401(k) plans in 2008, up from 5.4 percent in 2007. The biggest reason: a 16 percent increase in hardship withdrawals. Hewitt points out that some firms in industries that have been especially hard-hit by the economy have been experiencing hardship withdrawals in excess of 10 percent of their population—nearly 9 times more than the average 401(k) plan.

Early withdrawals from IRAs and 401(k)s now are subject to a 10 percent early withdrawal penalty. Hardship withdrawals could surge if President-elect Barack Obama follows through on a campaign promise to permit penalty-free hardship withdrawals of 15 percent of the IRA or 401(k) account balance, up to $10,000, in 2008 and 2009. Of course, the withdrawals would still be subject to normal income taxes.

Interestingly, 401(k) loan activity has remained consistent, with 22 percent of employees currently having a loan outstanding, according to Hewitt.

“Because the credit crisis has made borrowing from financial institutions more difficult, we’re seeing more employees turn to their 401(k)s to get the money they need to help them get by,” explains Hess. “It’s unfortunate that employees are turning to hardship withdrawals instead of 401(k) plan loans, because hardship withdrawals are subject to penalties and additional income taxes that can dramatically and permanently erode employees’ future retirement dollars.

Hewitt also points out that workers are not allowed to contribute to their 401(k) plan for six months following the hardship withdrawal. Loans, on the other hand, enable employees to borrow money penalty-free and, more importantly, continue to make contributions to their 401(k).