Hewitt: 401(k) Activity Hits Lull in 2002

June 17, 2003 (PLANSPONSOR.com) - Almost all measures of participant activity in 401(k) plans were down in 2002, as a weak economy and market volatility continue to pose challenges to defined contribution plans.

Employees continue to interact infrequently with their 401(k) plan asresearch shows declines in participation, transfer activity, equity allocation and for some employee populations, contribution rates. Hardest hit among these measures was transfer activity, with only 16.8% of plan participants making any form of trade in 2002, according to data by Hewitt Associates.

Transfer activity permeated throughout participant activity. A verage plan participation rates fell 2.8% to 68.2%, mostly among younger and low-tenure employees. Further, even though the 7.8% average contribution rate remained unchanged in 2002, contribution rates among younger and low-tenure employees, declined to 6.5% of pay for participants age 20 to 29.

“Employees lost ground in 2002,” Lori Lucas, Hewitt defined contribution consultant, said in a statement. “The market environment has taken a toll on employees’ willingness to participate and interact with their 401(k) plans, resulting in missed opportunities toward their retirement goals.”

The decline fortunately, did not have nearly as large an impact on participant balances. Thanks in large part to assistance from employee and employer contributions, the average total plan balance at year-end decreased only 2.5% to approximately $49,000. Overall, though more than one-quarter (27%) of active participants have a total plan balance of less than $5,000, with an average participant age of 43 and annual salary of $57,000.

Equity Allocation

However, perhaps most alarming is not what changed, but what did not. Despite continued reports of corporate malfeasance, diversification away from corporate stock was not a top priority for many participants in 2002. In fact, the average participant holding company stock had 42% of balances in company stock. Further, more than one quarter (28%) of employees held 50% or more of their 401(k) plan balances in company stock.

While the average defined contribution plan offered 13 funds, participants held an average of 3.6 funds. In addition, nearly 40% of employees held only one or two asset classes: company stock, GIC/stable value, or large US equity. By the end of 2002, the average participant account held 66% of their balances in equity investments, down from 74% in 2000.

Copies of the complete report, “How Well Are Employees Saving and Investing in 401(k) Plans, 2002 Hewitt Universe Benchmarks,” are available for $350 by contacting the Hewitt Information Desk at (847) 295-5000 or infodesk@hewitt.com .