Not Much Movement in 401(k)s

When it comes to their 401(k) plans, too many investors are stuck in neutral. 
A new survey of large-company 401(k) plans by Hewitt Associates showed negligible increases in participation, contribution rates and fund-switching activity last year compared with 2002. 

That was surprising, considering the Standard & Poor's 500 index was up 25 percent last year. 

"We would have hoped to see a little more engagement in the 401(k) process because of the stronger stock market," says Lori Lucas, Hewitt's director of participant research. 

During the bear market, participation declined, transactions slowed to a crawl and many people stopped opening their statements. 

"People were saying, 'I'm going to wait until the market stabilizes,' '' Lucas says. But "when the market started going up, we didn't see a sea change. We saw a little more participation, a little more contributions," she says. 

The average employee-participation rate inched up to 70 percent in 2003, compared with 68 percent in 2002 and about 70 percent in 2001. 
Participation is the key measure of a plan's success. More and more, the 401(k) is the primary or only retirement vehicle, and it's becoming more important as retiree health benefits are cut. 

Employers also want high participation rates so their plans don't fail anti-discrimination tests. These tests prevent highly compensated employees from contributing the maximum to their plans if employees at all levels are not contributing enough. 

But many employers are still having a hard time getting younger, lower- paid people involved. On average, only 45 percent of 20- to 29-year-olds participated in their plans last year, Hewitt says. 

The average contribution for all workers crept up to 8.1 percent of pay from 7.8 percent in 2002. 

Even when they participate, few employees are actively managing their plans. 
Only 17 percent of employees made any change in their investment allocation last year, about the same as in 2002. In 2000, 30 percent made a transfer. 
"To the extent they are not timing the market, that's a positive," Lucas says. But left untended, 401(k) plans get out of balance. 

For example, if an employee wants to be 60 percent in stocks and 40 percent in bonds and the stock market has a couple great years, the stock allocation will grow well beyond 60 percent. To rebalance, the employee should sell stocks and buy bonds until the account gets back to 60 percent stocks. 
Reaching their goals 

Rebalancing helps employees reach their goals and increase their odds of selling high and buying low. 

Another troubling statistic: On average, employees holding company stock had 41 percent of their balances in that investment (unchanged since 2002) and 27 percent of them had 50 percent or more of their balances in company stock. 
Given all the Enron and WorldCom employees who lost their shirts in company stock, you'd think employees would be diversifying more. 

But "people really don't extrapolate the experience of other companies to their own employer. They go to work every day; they think it's a solid investment," Lucas says. 

The Hewitt survey covered 2.5 million employees at Fortune 500-size companies. 

The average 401(k) account balance in the survey increased 35 percent to about $64,600 in 2003, which exceeded 1999 levels for the first time. 
The average total return from investment earnings and capital gains was 24 percent. The rest of the increase came from new contributions. 

The average account was invested 68 percent in stock or stock funds, 17.1 percent in guaranteed investment contracts or stable-value funds, 11.4 percent in bonds or bond funds and 3.5 percent in money market funds. 

Rick Meigs, president of 401khelpcenter.com, says employers can take advantage of employees' inertia by automatically enrolling them in the plan as soon as they are eligible. Employees must be given a chance to opt out. 

If they don't, a certain percentage of their pay is automatically invested in a default option, usually a money market fund. 
Auto-enrollment offered 

About 14 percent of employers offer auto-enrollment, a number that has been stagnant for several years, according to Hewitt. 

One problem with these plans is that the initial minimum contribution, usually 2 to 3 percent, is too small, and the default option too conservative, Meigs says. 
And automatic enrollment snags many employees who would have invested more money in more aggressive options if they had to take action themselves. 
To solve these problems, Meigs would like to see the initial contribution set at 5 percent, increasing by one percentage point each year until it reaches 10 percent. 

He would also like to see the default option be an actively managed fund or a lifestyle fund that starts out aggressive and gets more conservative as the employee ages. 

It would also help, he says, if employers offered bigger matching contributions and went more aggressively after non-participants. 

Lucas says some companies have had success by marketing to employees like they were reluctant consumers. 

One company sent postcards to nonparticipants and said all they had to do was put a checkmark in a box and they would start contributing a predetermined amount into a certain fund. "It reduced the decision to yes or no. It created a sense of urgency. You had to return it by a certain date," Lucas says.

Companies are not allowed to offer monetary rewards to get employees into the 401(k) plan. But one company offered employees a chance to win a trip to Hawaii if they visited the plan's Web site. The promotion attracted a lot of younger employees and got many of them enrolled. 

Another employer sent personalized reminders to employees after they had been on the job for six months, which is when they became eligible for a matching contribution from the company. 

Going even further, one company sent personalized statements to non participants telling them how much they were giving up, based on their age and salary.