401k Behavior in the Current Economy

Current economic conditions mean that thoughtful, rational 401k planning is more important than ever. It is very useful to understand how 401k plan participants are behaving in the aggregate as you develop your own 401k planning priorities.

Fortunately, human resources consulting firm Hewitt Associates recently reported on its survey of 401k participant behavior in the midst of the current finacial turmoil. Some interesting and useful facts emerge from this study:

1. Overall, employees are "staying the course" and maintainig their 401k contribution levels. Saving rates have dropped just marginally (from 8.0% to 7.8%) and only 4.0% of employees have terminated 401k contributions entirely.
2. The average 401k balance has dropped 14 percent so far in 2008 to $68,000, down from $79,000 in 2007;
3. While 401k contributions are being maintained, there is evidence of employees moving away from stocks to less risky assets. The allocation of 401k investments to stocks is at an all-time low of 53.8% of assets, down from 68.1% a year ago and the all-time high of 74.2% in 2000. Unfortunately, this may be indication of failure to maintain a long-term perspective and selling at a the wrong time. According to Hewitt:
   

   "The concerning behavior we are seeing, however, is some evidence of knee-jerk investment decisions, with a significant increase in the number of investment transfers immediately after the market drops. In the vast majority of cases, employees who impulsively respond to the fluctuations of the market can dramatically reduce their overall retirement savings, as employees are unlikely to readjust their investment portfolio when the market makes a turn for the better. Therefore, it's important to keep in mind that retirement saving is a long-term strategy"

4. As might be expected, the worsening economy has caused more employees to take hardship withdrawals from their 401k plans. More than 6.0% of employees withdrew funds from their 401k's in 2008, up from 5.4% in 2007.
5. On the other hand, 401k loan activity has remained steady with 22.0% of employees currently having a 401k loan outstanding.

A complete summary of Hewitt's 401k survey can be found here.