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State of the 401(k): Amazingly, 2008 Wasn't All Bad

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When Fidelity Investments issued a report on 401(k) performance for 2008, most media accounts focused in on the obvious: we all got creamed last year. The investment giant's "State of the 401(k)" report--reflecting returns for more than 11 million workplace retirement savers--showed that the average account balance dropped 27 percent compared with 2007, to an average of $50,200.

But it was something else in the report that amazed me: investors are standing by their 401(k) accounts through the worst bear market in decades. In fact, the Fidelity data points to remarkably steadfast decision-making by investors--even through the grim fourth quarter. Plan participants contributed an average of $5,600 in pre-tax earnings, which was "slightly higher" than 2007 levels, according to Fidelity. Even during the ultra-volatile fourth quarter, 96 percent of plan participants continued their pre-tax payroll contributions.

Fidelity saw a net transfer out of equities in 2008 of just 2 percent, according to Scott David, the company's president of workplace investing. "Very few people stopped contributing," David said. "They're reallocating assets and some are taking loans and hardship withdrawals, but we're not seeing anything out of line with previous years. It's not a mass panic."

Another positive trend amidst the wreckage was a dramatic increase in the adoption of automatic investment options by employers. These include auto-enrollment for new employees, and using lifecycle funds as the default investment in plans. Fidelity reports that over 60 percent of plans were using lifecycle funds as a default at the end of 2008, up from 38 percent a year earlier. Auto enrollment rose to 16 percent from less than 11 percent in 2007.

Auto-enrollment is critical because far too many Americans just don't save at work. The Employee Benefit Research Institute (EBRI) reports that just 44 percent of American workers participate in a retirement saving plans.

Lifecycle--or target date funds--offer a great way to put investment decision-making on auto-pilot. The funds hold an investment mix targeted to the year you plan to retire, and automatically reduce the share of equities to reduce your exposure to stocks as retirement approaches. Research by EBRI shows that if all 401(k) participants had been in target date funds during last year's meltdown, many of the investors within 10 years of retirement would have seen their losses trimmed by at least 20 percent.

Here's another good thing that happened last year: fewer 401(k) investors had big percentages of their savings tied up in the stock of their own employers. Having a large portion of your account tied up in your own employer's stock is a form of double risk exposure. If the company performs poorly, you risk losing your job as well as the value of the stock (see: Enron). So it's good news that Fidelity reports a continuing downward trend in the amount of company stock held in plans--about 10 percent of overall assets in workplace savings at the end of 2008, own from over 20 percent in early 2000.

Fidelity's David says a growing number of companies are pulling away from requiring employees to invest in company stock due to the risk involved. "They have fiduciary responsibility for their plans and that means they need to put employee interests first," he says.

Not all the trends were positive, of course. In particular, two trends show just how much financial stress investors are feeling:

--Older investors shifted out of equities. Older investors were looking to preserve capital they're likely to need soon. Fidelity reports that investors in their sixties cut the percent of equities in their portfolios to 46 percent at the end of 2008--down from 61 percent in 2007.

Withdrawals and loan rates are rising.
Hewitt Associates reported an uptick in the number of employees tapping into their 401(k) plans last year--six percent compared with just over 5 percent in 2007. The increase was due to a 16 percent increase in hardship withdrawals.

For more on retirement saving trends, visit RetirementRevised.com.