A new survey by the Investment Company Institute finds that most Americans are still confident that their 401(k) plans can help them reach their retirement goals, but last year's 31% average drop in account balances has also highlighted the need for improvements to this popular, critical retirement vehicle.

Improving education and financial literacy among investors, as well as boosting participation among African American and Hispanic minorities, should be a top priority of the nearly $12 trillion mutual fund industry, said Mellody Hobson, president of Ariel Investments.

"Typically, African Americans were underinvested in the stock market compared to our white counterparts," Hobson said.

According to annual research by Ariel Investments and Hewitt Associates, there are significant differences across racial and ethnic groups in how employees save and invest in their 401(k) plans. African American and Hispanic workers have much lower participation and contribution rates, the research found. The most recent report, released in July, showed that 66% of African-Americans and 65% of Hispanics participate in their company's defined contribution plans, compared to 77% of whites and 76% of Asians. African Americans earning between $30,000 and $59,999 have 401(k) balances averaging $21,224. Among whites, it's $35,551.

"The minority savings disparity is an area where we can actually move the needle in a positive direction," Hobson said. "The best way to expand the reach of savings for all Americans is through financial literacy, education and opportunity. Minority employees in companies can and want to do a better job in savings."

"Contrary to what you might have read, the 401(k) system has a long and productive future ahead in providing retirement security for millions and millions of Americans," said Paul Schott Stevens, ICI president and CEO, referring to numerous media accounts over the past two years that 401(k) plans are broken, many calling them "201(k)s."

"Americans don't just talk about their support for 401(k) plans; they have demonstrated their confidence with their actions in the face of one of the worst bear markets since the Great Depression," Stevens said.

However, the fact that most Americans made no changes to their 401(k) plans while the financial world came crashing down could be interpreted in many ways. Confidence and ignorance often go hand in hand.

"Americans believe these plans can deliver," Stevens said. "Seventy-three percent of all households are 'somewhat confident' or 'very confident' that 401(k)s and similar retirement plans can help Americans meet their retirement goals. And those who are most familiar with the plans are the most confident."

"Investors largely stayed the course and recovered through the combined power of regular savings, diversified portfolios and the sharp stock market recovery since March 2009 lows," said John J. Brennan, Vanguard chairman emeritus. "The majority of account balances are up over the course of two years, back to where they were."

According to Fidelity Investments, the average balance of 401(k) plans it manages fell 31% from $69,200 at the end of 2007 to $47,500 at the end of March 2009. By the end of September, the average plan balance had recovered to $60,700 as stock markets rebounded.

Stevens noted that plan withdrawal and loan activities are in line with historical numbers, with only 2.6% taking loan withdrawals and 1.3% taking hardship withdrawals. Nearly 95% of participants kept contributing to their plans through most of 2009, he said.

"These are remarkable figures," Stevens said. "On question after question, we see levels of support north of 70%, and this after months of negative coverage and criticism of the employer-based retirement system."

The 401(k) is a brand name to most Americans. Even if they don't understand how it works, most people understand that it's important to save for retirement.

Industry leaders say media reports that disparage the 401(k) brand can have a negative effect on investors and discourage them from using defined-contribution plans to save for retirement.

"The jargon about 401(k)s becoming 201(k)s was cute, but deleterious, and it ultimately discourages investors from playing," Brennan said. Misguided commentary can turn investor inertia into a liability, he said. Once investors get out of the market, many won't know when to get back in.

"Use of that kind of language is damaging and irresponsible," Hobson said.

401(k)s are designed to provide tax-deferred savings through diversification. They are not designed to provide guaranteed income in retirement, which many investors may confuse with annuities. While the fund industry criticizes annuities for being expensive and illiquid during emergencies, investors are attracted to the guaranteed stream of retirement income, regardless of market activity.

"The financial crisis has left millions of people desperately wanting answers on how to protect themselves and [how to find] some hope of a secure retirement," said Cathy Weatherford, CEO of the Insured Retirement Institute. "Throughout the crisis, not one annuity provider ever missed a payment."

Retirement plans should include a built-in, low-cost, guaranteed-income option, that will cover basic costs for life, said Roger Ferguson, CEO of TIAA-CREF. "Choice is important, but the critical issue is whether an account can provide enough income in retirement," he said.

"The Labor and Treasury Departments are looking at whether they should encourage or require retirees to convert some of their account balances to annuities, and some lawmakers have expressed support for an annuity mandate," Stevens said. He said the data from the survey made it difficult to get a clear read on public attitudes about annuities, and recognized that "Americans' No. 1 source of retirement income is the annuity known as Social Security [but] Americans soundly reject the idea that the government should mandate turning 401(k) assets into annuities. Almost unanimously, the households in our survey agreed that retirees should be able to make their own decisions about how to manage their assets."

While it's still unclear how 401(k) plans can become more nimble for investors, simply providing the tools isn't enough. "Information is not knowledge; knowledge is not wisdom," Hobson said.

If investors are going to be expected to manage their own retirement savings, they will need all the help, education and advice they can get.

"The days of retiring with a pension and a gold watch are waning," she said. "These days, focusing on retirement is your job. You're all you've got. You've got to participate in order to have a secure retirement. Know what you own and seek more information."

 

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