Participant Tips Offer Sponsor Insights

April 10, 2001 ( - With April 16 less than a week away, consulting firm Hewitt Associates has put together a list of tips to help employees avoid making a 401(k) mistake.

While the points are focused at participants, the survey results are valuable fodder for plan sponsors trying to help participants effectively use and manage their retirement investments.

The List:

JOIN THE CLUB – On average, just 77% of eligible employees participate in their 401(k). Hewitt’s research indicates that older employees have a higher participation rate, with 86% of those age 50-59 participating versus only 59% of those under age 30.

DON’T LEAVE MONEY ON THE TABLE – While 97% of employers offer some form of match or contribution, more than half of eligible employees (59%) didn’t contribute up to the maximum threshold. Of those who didn’t take advantage in their first year, the vast majority (81%) didn’t do so in the second year of participation either.

COMPOUNDING IS A GOOD THING. In a study of a half million eligible employees, Hewitt found that nearly half (46%) of those under age 30 making less than $80,000/year contributed nothing in 1999. If that same employee had an account balance of $3,600 at age 25 – quit contributing for five years – and then contributed $5,000/year, he/she would have $260,000 less saved by age 60 than if they had contributed as little as $2,400/year during that five year period.

SET YOUR SAVINGS GOAL. Hewitt’s research finds that 401(k) participants are drawn to “round” numbers in choosing a rate of contribution. In fact, Hewitt found that nearly a quarter (23%) opted for either 5% or 10% rates of contribution – suggesting that employees aren’t matching their savings needs with the rate of contribution.

NEW JOB? DON’T CASH OUT THE 401(k) – Hewitt research of some 170,000 defined contributions participants found that more than two-thirds (68%) of 401(k) participants opt for a lump sum distribution when changing jobs. Only a quarter (26%) roll those into IRAs, and just 6% move them into a new employer’s plan (see Most Participants Cash Out, Rather than Roll Over – Hewitt Survey.

LIFESTYLE FUNDS CAN BE HELPFUL – IF YOU USE THEM APPROPRIATELY – While employers intend lifestyle choices to be a “turnkey” investment option for participants, many participants tend to use them as just another fund choice ( see Lifestyles Often Viewed As Just Another Fund, Cautions Hewitt.

ON AUTOPILOT? DON’T LET INERTIA DRIVE YOUR INVESTMENTS. – Automatic enrollment increases participation rates, but Hewitt’s research indicates that those automatically signed up tend to keep their money invested in a default – and generally conservative – investment choice. The default should be seen as a starting point, not the end all (see AUTO-PILOT – Automatic Enrollment Not Enough to Overcome Inertia.

IT’S OKAY TO TAKE A LOAN. IT’S IMPORTANT TO UNDERSTAND ITS IMPACT – Nearly all 401(k) plans (92%) now offer participant loans, according to Hewitt research. The average principal outstanding amount per participant is $6,900, against an average balance of $57,000. Nearly a third (30%) of those aged 40-49 year-olds have a loan outstanding – and while the money is paid back with interest, participants lose out on market returns on the money.

DIVERSIFY. TAKE ADVANTAGE OF THE FUNDS AT YOUR DISPOSAL – Hewitt research shows that the average 401(k) plan offers 11 investment options, yet 36% of participants allocate their money to a single investment choice. Another 19% invest in just two funds.

DON’T FORGET TO REBALANCE – A Hewitt study found that just 28% of participants surveyed make a trade in their account. Buy and hold is a commendable strategy, but market shifts can tilt the portfolio.

– Nevin Adams