Younger Workers Slow to Start Saving

May 10, 2005 ( - While overall participation rates moved up slightly, less than half of workers under the age of 30 are participating in their 401(k) plan, according to a new study.

Overall participation rates inched up to 70.3% in 2004, an increase of 2.1% from 2002, according to a study by Lincolnshire, Illinois-based Hewitt Associates.   The report, which considered the behaviors of some 2.5 million participants, also found that nearly 80% of those who contributed to their 401(k) in 2004 did so at a level sufficient to receive the company match.   On the other hand, Hewitt notes that nearly a third (31%) contributed “only” enough to receive that match, and that roughly one in five (22%) failed to contribute enough to receive the full match available (see also  Non-Savers Unmoved by Match, Education ).   Nearly a quarter (23%) of those who were participating had a balance of less than $5,000.

Younger Daze?

Younger workers were less likely to participate in these plans (only 46% of those under the age of 30 did so, according to Hewitt), and workers in their 20s invested less in equities than did those in their 30s, according to Hewitt.   That tendency may well be a function of when they began participating than their age alone, however.   Studies have shown that participants demonstrate a propensity to make that initial investment decision based on the investing environment at the decision point.   This “anchoring effect” could suggest that workers who joined their 401(k) plan during the bull market of the 1990s would be more inclined toward equities than those who made that initial investment decision after stock values had fallen from that peak (see  Starting Point Anchors Participant Focus: Vanguard ).

Younger workers have also apparently embraced the notion of investing based on pre-mixed asset allocation funds tiered toward one’s projected retirement date.   Nearly 44% of younger workers chose to invest in these so-called “lifestyle” funds in 2004, an increase of 4% from 2002, according to Hewitt.   The report goes on to note that more than half – 57% – of workers with less than a year of tenure chose to do so, a testament to the impact these offerings have had on what is for many the most difficult savings decision – how to invest their retirement savings (see  Get a Life (Style) ).

Not that those offerings are a panacea for the challenges of effective asset allocation.   While the Hewitt study found that workers who chose lifestyle funds were likely to have less money allocated to company stock and GIC/stable value funds than the typical saver, only 15% have all of their non-company stock balances in a single lifestyle fund.   That suggests that workers continue to view these as just another investment choice on the menu, rather than as the single choice they are designed to provide (see  Lifestyle Lessons ).  

Appropriate diversification still seems to elude many participants.   In the Hewitt study roughly 27% of participant balances were invested in company stock in 2004, a holding that remains the single largest allocation for employees participating in their company's 401(k) plan (see  Put A Lid on It ).   Moreover, 27% of employees in the Hewitt database have half - or more - of their total 401(k) balances invested in their employer's stock.   In fact, among those workers investing in company stock, the average balance was approximately 41%, and that is essentially unchanged from 2002, according to Hewitt.  

Regarding overall diversification, the Hewitt study found that the number of funds held by participants rose to 4.2 from 3.6 in 2002, and that the number of participants holding just one or two asset classes within their 401(k) portfolio decreased.   However, nearly a third (32%) still had invested in only one or two asset classes in 2004 (versus 39% in 2002).   Hewitt also noted that only one in six (16.7%) of participants actually made a transfer in their 401(k) account in 2004 (see  December 401(k) Transfers Stagnant ).

Other Trends

The Hewitt survey also noted the following trends:

  • 2% of workers had balances in a self-directed brokerage account when available.   These accounts were typically used by longer-tenured and higher salaried workers, according to Hewitt.
  • Roughly a quarter (23%) had an outstanding loan from their 401(k) plan, consistent with prior years
  • The average 401(k) participant is 43, has approximately 10 years of tenure, and makes $58,000/year.   By contrast, the average non-participant is 39, has an annual salary of $33,000, and has an average tenure of 5.4 years.

Copies of the complete report, "How Well Are Employees Saving and Investing in 401(k) Plans, 2005 Hewitt Universe Benchmarks," are available for $350 by contacting the Hewitt Information Desk at (847) 771-2500 or .