Stronger Markets Help Push Up Higher K Plan Balances

May 24, 2004 (PLANSPONSOR.com) - A strengthening domestic economy and more sightings of the bulls on Wall Street have bumped up average 401(k) plan balances by 35%, but that doesn't necessarily mean people were saving more and investing more wisely.

New Hewitt Associates research found an average 2003 K plan balance of $64,600 – beating 1999 levels for the first time – but workers still aren’t stepping up their plan participation rates much.

Hewitt’s study of the saving and investment behavior of more than 2.5 million employees in 2003 found that K plan participation inched up slightly to 70% in 2003 from 68% in 2002 while 30% of eligibles weren’t in their K plan at all. Just under half of workers age 20 to 29 (45%) were in the K plan.

“What’s particularly troubling is the persistently low participation rate among younger workers even when there’s a stronger market,” said Lori Lucas, Hewitt director of participant research, in a news release. “This is the toughest group of employees to reach because retirement is such a distant event for them. But with rising retiree health care costs and declining support for traditional pension programs, they are a group that may ultimately need to rely more on their 401(k) savings than their older peers.”

K plan participants are also still not moving their assets around very much, according to Hewitt, with one in six participants doing any 2003 transfer activity. On average, employees who participate in their company’s 401(k) plan ended the year with 68% in equity investments, a 2% increase from 2002 but still down from the Hewitt 401(k) Index high of 74% in 2000.

“In many cases, employees don’t actively manage their 401(k) portfolios because they don’t know how to make good investment decisions,” said Lucas in the announcement. “They feel safer doing nothing and letting their asset allocations be dictated by market movements. But this translates into a subtle form of market timing. As the market peaks, they may have increased exposure to stock investments, and as the market bottoms, they may have less exposure. Employers need to make it clear that long-term investing does not mean simply forgetting about your 401(k) portfolio. That’s a common misperception by employees.”

Further, Hewitt’s research shows evidence that diversification is still not a top priority for many K plan participants. More than a third of employees’ portfolios were concentrated in just one or two asset classes, and 14% of employees had only one asset class represented – typically company stock or GIC/stable value. Employees who are younger and lower-tenured were most likely to have their balances in fixed-income investments.

Notably, employees’ commitment to company stock remains significant. On average, employees holding company stock had 41% of their balances in that investment, essentially unchanged from 2002. More than one-quarter (27%) of employees held 50% or more of their 401(k) plan balances in company stock, which may be attributable to years of accumulation of company match and profit sharing.

Copies of the complete report, How Well Are Employees Saving and Investing in 401(k) Plans, 2003 Hewitt Universe Benchmarks, are available for $350 by contacting the Hewitt Information Desk at (847) 295-5000 or at infodesk@hewitt.com .

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