Participation in 401(k)s has dropped to 73%, its lowest number since 1991.
That's the alarming word from a new Buck Consultants survey. The number may signify some tough times for investors and 401(k) plans, but things may be even worse today, according to Rich Koski, a principal with Buck Consultants, who said that the survey's findings are based on 2001 company data. The New York consulting firm plans to release an updated version in the summer to determine what type of employees are opting out of their 401(k) plans.
The survey of plan sponsors was conducted from February to June of 2002.
Meanwhile, he speculated on possible reasons for the downturn: low investment performance and participants' general economic uncertainty, or perhaps companies' failure to educate employees.
"You've got to keep banging the drum. You can't just bang it once," Koski said.
Education and advice is definitely a priority, according to financial planners. "I don't think the 401(k) plan is at fault here. Ill-advised investors are largely at fault, but what did we expect by allowing investors to control their own retirement assets?" asked Ken Roberts, a principal with Harbor Lights Financial Group in Wall, N.J.
"A lot of employees overweighted on their company's stock, and that has been very detrimental," Roberts said.
Government initiatives also see the value in investment advice for employees. Ohio Congressman John Boehner's Pension Security Act of 2003 proposed that fiduciary advisors be able to offer financial advice on 401(k) plan investment choices. The bill passed the House last session, but stalled in the Senate (see MFMN 10/28/02). The bill was reintroduced at the end of February and will be considered by the House for passing by the end of April.
Approximately 91% of respondents reported an employer match of some form. However, despite the survey results, more and more companies are choosing to cease matching programs - at least while profits are down. General Motors and Charles Schwab are just two examples.
Koski thinks taking away matching is a bad idea. "The matching contributions are always the major determinant in how good your participation [in 401(k) plans] is going to be," he said, adding that it's typically one of the last benefits that companies cut as a cost-saving measure.
However, Mike Scarborough, founder of The Scarborough Group in Annapolis, Md., said that GM alters its matching contributions depending on earnings reports. His GM employee clients are used to the routine changes because they know to stay disciplined with their own contributions.
"Many people have come to the conclusion that Social Security may not be there for them and they're responsible for their own retirement," Scarborough said, adding that he doesn't feel that company matches are a big determinant in employee participation rates.
The survey also said that 86% of the respondents allow participants to change investment elections on a daily basis. However, 48% of plan sponsors plan to review their policies regarding ownership of company stock within the plans.
Other results showed that due to Economic Growth and Tax Relief Reconciliation Act changes, 61% raised the contribution limits for non-highly compensated employees, and 48% raised the limit for highly compensated employees. Loan features are also up-and-coming; 89% of the plans offer a loan feature for employees, with 80% charging a transaction fee for taking the loan.
Planners should remind clients who stop contributing of the importance of compounding effects. "The 401(k) plans are governed by inertia. If [clients] get enough motivation to drop out of the plan, they're going to require a lot of motivation to get back in," Koski said.
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