Study Shows Only Modest Improvement in U.S. Employees' 401k Saving and Investing Habits

Despite Employer Education Efforts, Research Shows Slow Progress in Employee Retirement Saving and Investing

LINCOLNSHIRE, IL, May 10, 2005 -- Despite increased efforts by employers to educate workers on the importance of actively saving for retirement, a new study by Hewitt Associates, a global human resources services firm, shows only a slight improvement in employees' 401k participation rates, plan balances and diversification efforts.

Hewitt's study, which examined the saving and investment behavior of more than 2.5 million employees eligible for 401k plans, shows that the rate of participation in 401k plans during 2004 increased 2.1 percent to 70.3 percent from 2002, and average 401k balances reached $69,000. However, nearly 30 percent of employees still did not participate in their 401k plans, with only 46 percent of workers under the age of 30 participating. Of those who did participate, nearly one in four (23 percent) had a total plan balance of less than $5,000. In addition, employee behavior around contribution levels, rebalancing and investing in company stock remained virtually unchanged.

"Despite all the attention around retirement, it's discouraging to see that many people - especially younger workers - still do not feel a sense of urgency to take control of their financial security by investing proactively in their 401k plans," said Lori Lucas, director of participant research at Hewitt Associates. "This is especially concerning because 401k plans are the main retirement vehicles for an increasing number of employees. While employer efforts to encourage better saving and investing habits seem to have some positive effects, many employees are not heeding the wake-up call to prompt them into action."

401k Company Matches

For the first time, Hewitt's study looked at the number of employees who contributed enough to their 401k plan to receive the company match. Almost 80 percent of employees who were contributing to their 401k plan contributed enough to receive the company match in 2004; however, one in three (31 percent) contributed only enough to obtain the full company match. As many as one in five employees (22 percent) failed to contribute enough to obtain the full 401k company match.

"Employees who do not contribute enough to receive their employer's full matching contribution are leaving free money on the table," said Lucas. "Even those who contribute enough to obtain the full company match may only be contributing 3 to 4 percent of pay - a common match threshold. This may be far too low to ensure financial security."

Transfer Activity and Equity Allocation

Consistent with past years, the majority of employees did not attempt to rebalance or reallocate their 401k portfolios in 2004. Only one in six (16.7 percent) actually made a transfer within their 401k account in 2004.

Hewitt's study shows that, on average, employees who participate in their 401k plans had almost 70 percent of their total plan balances in equity investments in 2004, an increase of roughly 4 percent since 2002. Interestingly, workers in their 20s invested less in equities than workers in their 30s.

Diversification and Lifestyle Funds

Hewitt's research shows a slight improvement in employees' 401k diversification efforts. The number of funds held by participants in 2004 increased to 4.2 funds, up from 3.6 funds in 2002. In addition, the number of employees holding one or two asset classes decreased to 32 percent, from 39 percent in 2002, which suggests that some employers are making progress in their efforts to facilitate diversification by offering third-party investment advice and making lifestyle funds available in their 401k plans.

Indeed, lifestyle funds continue to remain popular, with nearly 40 percent of workers who had the option available to them choosing to invest in them, which is consistent with 2002. Nearly 44 percent of younger workers elected to invest in lifestyle funds in 2004, an increase of about 4 percent from 2002, and more than 57 percent of workers with less than one year of tenure did so.

Hewitt's study shows that employees who chose lifestyle funds were likely to have less allocated to company stock and GIC/stable value than the typical employee. Still, very few employees used lifestyle funds as they were intended - only 15 percent have all of their non-company stock balances in a single lifestyle fund.

"Lifestyle funds are attractive - particularly to younger workers and more inexperienced investors - because they enable employees to achieve a measure of diversification within their 401k plans with minimal effort," said Lucas. "Companies that offer automatic enrollment features in their 401k plans may want to consider lifestyle funds as their default investment option, which would enable employees to be well diversified without requiring them to proactively rebalance their 401k portfolios."

Company Stock

On the other hand, employees invested, on average, approximately 27 percent of their total 401k balance in company stock in 2004, which is still the single largest holding for employees participating in their company's 401k plan. About one in four (27 percent) employees held half or more of their total 401k balances in their employer's stock. Among employees holding company stock, their average balance was approximately 41 percent - which is essentially unchanged since 2002.

"With such little evidence that many employees understand or appreciate the risk of owning large amounts of company stock, diversification remains an issue in many plans," Lucas says.

Additional Findings

Other findings from the survey include:

• Two percent of employees had balances in a self-directed brokerage account (when available) in 2004. These accounts were typically used by employees who were longer-tenured and who had higher salaries than the average employee.
• Nearly one-quarter of employees (23 percent) had an outstanding loan from their 401k plan in 2004, which is consistent with past years.
• The average 401k participant is 43 years old, has approximately 10 years of tenure and earns an annual salary of approximately $58,000.
• In contrast, the average employee who does not participate is younger (average age 39), has a lower annual salary ($33,000) and a lower tenure with the company (average 5.4 years).

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

About Hewitt Associates

With more than 60 years of experience, Hewitt Associates (NYSE:HEW) is the world's foremost provider of human resources outsourcing and consulting services. The firm consults with more than 2,300 companies and administers human resources, health care, payroll and retirement programs on behalf of more than 300 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 20,000 associates. For more information, please visit www.hewitt.com.

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