Half full? In these dire times, we tend to think half empty, if not drained, when it comes to our retirement plans. Over the last three years, the downturn has eradicated at least $678 billion in U.S. retirees' savings, according to the University of Michigan.

However, two newly released studies suggest 401(k) participants continue to have faith in the system. Through a joint pairing, an Employee Benefit Research Institute (EBRI)/Investment Company Institute (ICI) survey on 401(k) participants found, on the whole, "401(k) plan participants continued to display a long-term investment strategy."

Moreover, a study by The Vanguard Group found retirement account balances remained steady, despite negative performance. Although the markets were down, continual inflows into 401(k)s kept account balances fairly steady, with balances dipping a mere 4% in 2001, according to the EBRI/ICI report. Vanguard also found the performance of an average plan dropped 13.3% in 2002, as opposed to the 22.1% decline in the stock market.

Blind Faith?

What keeps investors believing in 401(k)s? It's either the success of the investment management industry in stressing the long-term view, or "inertia," Kathryn Hopkins, an EVP at Fidelity Institutional Retirement Services Co., told The New York Times last week.

Indeed, Vanguard calls this inertia the "contribution effect," in which regular contributions help offset investment losses.

The psychology behind the contribution effect could be explained by the Barriers to Savings poll, conducted by Allstate Financial, which found 93% of those surveyed believed it was the individual's responsibility to ensure their own retirement security.

Ironically, however, the Allstate poll also showed as many as 70% of the 75% of participants who are saving for retirement on a regular basis are not able to save as much as they would like, with 57% citing bills and other expenses as the main barrier. The poll seems to attribute this trend to another key barrier to saving, which was "too little income" or a "lack of money," accounting for 40%. The University of Michigan study underlined this notion of a dearth of money, noting the increasing tendency of those nearing retirement to postpone it and remain in the workforce.

So if more people feel pressured to stay in the workforce longer due to a lack of funds and 401(k) investment performance is in the negative digits, why are participant account balances staying steady? An Intuit survey of Americans with annual incomes of at least $75,000 who actively manage their investments, found while nine out of 10 respondents said their retirement portfolios have decreased in value, 34% planned to increase the money invested in retirement funds. Perhaps this is representative of the fact that wealthier individuals have more leeway in covering losses and staying the long-term course.

But what about the rest who don't have fallback funds? Perhaps the glass is so empty, participants have sunk into a state of paralysis, continuing their contributions from habit or indifference. Jim Jaffe, director of external relations for EBRI said, "We have noted in the past that continued contributions to 401(k)s has a lot to do with automatic payroll deductions. Other than that, we don't have any explanation for this pattern."

Although disinterest may be a factor, a new study by Buck Consultants finds investors aren't uninformed or indifferent. In light of the corporate scandals, 48% of plan participants said they planned to review their policies regarding company stock in their 401(k) plans, and of those, 73% said this decision was directly related to Enron. The Intuit survey also found more investors were conducting their own research to make sound investment decisions. When making these decisions, 58% of investors said they consulted newspapers, magazines or newsletters, and 70% said their confidence in financial experts declined "a lot" or "somewhat."

So, again, if participants are losing money, are maintaining steady balances thanks only to their continued contributions, aren't able to invest as much as they'd like, and have become distrustful of financial info, then why are they still participating at all?

Cracks in the 401(k)

Perhaps it's due to the fact that we're in a transitional phase. Vanguard finds although participation rates have remained high, those participating were putting less in the plans. The average savings rate for 401(k)s fell 6% in 2001, from 7% in 1999, according to the firm's data. In addition, newer, younger employees seem to be responsible for the biggest drop in participation. According to the Buck survey, nearly half of the new hires surveyed chose not to enroll in company plans, citing sustained losses in stocks. Perhaps the new generation of investors will find other means of saving for retirement.

Investors certainly have their reasons for continuing to participate in 401(k)s. They just might not share the same reason.

Perhaps Jaffe is right in saying there really isn't an all-encompassing answer to this trend. At best, it's highly speculative.

Copyright 2003 Thomson Media Inc. All Rights Reserved.


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