Wednesday, May 18, 2005

Part 1

While 401k programs are one of the best choices for American workers to use when preparing for retirement there are troubling developments and warning signs of more on the horizon.

The study by the large global human resources company Hewitt Associates called "How Well Are Employees Saving and Investing in 401k Plans, 2005 Hewitt Universe Benchmarks," provides a detailed look at the first problem with 401k programs today, lack of employee participation.

While most employers (especially the larger ones) are seeking to educate their employees to the benefits of investing in 401k programs employees aren’t paying attention. The numbers of employees who precipitate in 401k programs has largely remained constant for the last few years.

After studying almost 3 million employees who could participate in employee sponsored 401k programs Hewitt found that the number of workers involved in such plans only increase by about 2% last year. That increase brings participation to only about 70% of all eligible employees with available 401k programs. So 30% (approx) of employees who could be participating in a 401k program have chosen not to do so.

That’s a disturbing figure and a worrisome trend at a time when it is becoming all the more important for workers to save more for their retirement not less. We face a time of uncertainly about Social Security in this country. What, if any, benefits will be available for future retirees under the Social Security System remains to be seen. So we need to increase participation in our retirement savings programs like 401k’s if we want to be assured of avoiding a financial crisis in the future.

We also face an uncertain time as to what will happen regarding inflation. While it’s been modest for awhile energy and energy related costs seem set to explode over the next few years. That could mean inflation will be much worse than current projections predict. If inflation rears its ugly head it could be the final piece in the puzzle that spells hard times for any future retirees that aren’t properly prepared. We may yet see retirees having it worse than any time since Social Security was implemented.

When you look at the best group in the study (those above 30) they only had an average balance of approximately 69,000 dollars in their 401k accounts. That’s much better than the under 30 group but that’s not nearly enough when you consider how long they’ve been saving. They need to do much better than that or they’ll be at the mercy of Social Security a time when it may not be there.

Of workers less than 30 Hewitt found that only about 46 percent participated in a 401k program. And worse yet one in four of this group had an average balance of less than 5,000 dollars saved in their 401k account. That’s certainly not going to provide much security in their retirement. This is the very group who can least afford to not be saving more for their retirement. It’s only by starting to save at a young age that most of us will ever manage to have any meaningful accumulation in our retirement accounts. It’s the magic of compounding interest over time that creates the necessary return on investment to provide us with financial security.

So participation in a 401k or something like it is critical and the younger we start the better. This study showed however that this isn’t what’s happening. We are starting later and trying to catch up by saving more as we get older. The wise course would be to reverse this and save while we’re younger and let compounding interest do the heavy lifting. The younger we start the less we have to save to have the same amount later on.

Employees also aren’t doing any better at diversification or developing balance in their 401k funds than they are about saving enough. They need to take responsibility and educate themselves so they can do a better job of seeking to keep funds invested in securities and financial products fitting their age and risk tolerance. It isn’t hard to lean enough to keep your funds spread among a group of securities to protect capitol, keep your risks manageable, and still make a good ROI.

Add to that the fact that far too many employees are keeping too large a percentage of their 401k accounts invested in the company that employees them. Just ask the former employees of Enron and WorldCom about the wisdom of not diversifying your portfolio beyond the company that you work for. A very large number of Enron and WorldCom workers learned about diversification too late to ever recover from making that mistake. Not keeping all of your eggs in one basket is still very sound investment advice.

And last but not least is the fact that Hewitt found that while almost 80 percent of employees who were in a 401k plan contributed enough to receive some company match in 2004 only one in three (31 percent) contributed 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. That’s giving money away by default and is just plain silly. If I ran an ad tomorrow saying that if you came and deposited money in your bank savings account I would match some portion of it I’d have people lined up for miles. Yet that’s just what your employer is promising to do and he has a hard time finding takers. So contribute enough that they give you all the money you can get through matching funds.

Well this brings part one to a close. We can wrap up what we learned in part one about 401k’s with this simply list;

1. Start saving as young as possible.
2. Take advantage of a 401k program if you have the chance.
3. Keep your holdings diversified for your protection.
4. Educate yourself so you can take responsibility for and manage your portfolio.
5. Give at least enough to get the ENTIRE employer match available.

Just remember financial security and peace of mind can be yours! It’s more a matter of discipline than anything else.

In Part 2 we’ll finish up our look at 401k programs and what else we have to worry about while investing in them.

(The entire study this article was based on “How Well Are Employees Saving and Investing in 401k Plans” is Available for $350 by contacting the Hewitt Information Desk at (847) 771-2500 or

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