Hewitt’s annual study of the 401(k) saving and investing behaviors of nearly three million employees across 120 large-sized companies reveals that despite the market volatility of 2008 and 2009, only 16.2% of employees made any sort of fund transfer in 2009, down more than 3 percentage points from 19.6% in 2008.
In addition, participation rates and contribution rates remained virtually unchanged from 2008, at about 74% and 7.3%, respectively.
According to a press release, average 401(k) plan balances rose significantly in 2009, primarily due to strong market returns. The median rate of return was 24.3%, rebounding from a negative 28.3% in 2008. 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% lower than they were in 2007 before the recession ($79,570), Hewitt said.
Market appreciation also boosted the amount of equity 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’ 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,” said Pamela Hess, Hewitt’s director of retirement research, in the press release.
Hewitt’s research also found premixed portfolios, including target date and target-risk funds, now make up the largest portion of employees’ asset allocations. In 2009, participants held about a quarter (24.7%) of their assets in a premixed fund - up nearly 2% from 2008 and 8% from 2007 - followed by GIC/stable-value funds (17.1%) and large U.S. equity funds (15.3%). When available in the plan, about half of employees (51.2%) invested in a premixed portfolio. Among the workers that made a trade in 2009, about a quarter (25.2%) directed their assets into a premixed portfolio, and 26.6% new contributions were directed to this asset class.
“Target-date funds came under a significant amount of fire for their performance during the financial downfall in 2008,” added 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.”
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% of employers that automatically enrolled their employees into their 401(k) plan, the majority (69%) defaulted them into a target date fund.
Other key findings from Hewitt include:
- Nearly three in ten (28.2%) 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% 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% in 2008 to 12.7% 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% of plans saw inflows into company stock funds.
- During 2009, 7.1% of participants took a withdrawal - the highest level since 2002. More than a quarter (25.6%) of employees had a loan outstanding at the end of 2009, up slightly from 2008 (23.1%).
- By the end of 2009, 7.4% of the active participants elected to invest in a Roth 401(k) when it was available, down slightly from 7.9% in 2008.