Participant Tips Offer Sponsor Insights

While the points are focused at participants, the survey results are valuable fodder for plan sponsors trying to help participants effectively use and manage their retirement investments.

The List:

JOIN THE CLUB – On average, just 77% of eligible employees participate in their 401(k). Hewitt’s research indicates that older employees have a higher participation rate, with 86% of those age 50-59 participating versus only 59% of those under age 30.

DON’T LEAVE MONEY ON THE TABLE – While 97% of employers offer some form of match or contribution, more than half of eligible employees (59%) didn’t contribute up to the maximum threshold. Of those who didn’t take advantage in their first year, the vast majority (81%) didn’t do so in the second year of participation either.

COMPOUNDING IS A GOOD THING. In a study of a half million eligible employees, Hewitt found that nearly half (46%) of those under age 30 making less than $80,000/year contributed nothing in 1999. If that same employee had an account balance of $3,600 at age 25 – quit contributing for five years – and then contributed $5,000/year, he/she would have $260,000 less saved by age 60 than if they had contributed as little as $2,400/year during that five year period.

SET YOUR SAVINGS GOAL. Hewitt’s research finds that 401(k) participants are drawn to “round” numbers in choosing a rate of contribution. In fact, Hewitt found that nearly a quarter (23%) opted for either 5% or 10% rates of contribution – suggesting that employees aren’t matching their savings needs with the rate of contribution.

NEW JOB? DON’T CASH OUT THE 401(k) – Hewitt research of some 170,000 defined contributions participants found that more than two-thirds (68%) of 401(k) participants opt for a lump sum distribution when changing jobs. Only a quarter (26%) roll those into IRAs, and just 6% move them into a new employer’s plan (see Most Participants Cash Out, Rather than Roll Over – Hewitt Survey.

LIFESTYLE FUNDS CAN BE HELPFUL – IF YOU USE THEM APPROPRIATELY – While employers intend lifestyle choices to be a “turnkey” investment option for participants, many participants tend to use them as just another fund choice ( see Lifestyles Often Viewed As Just Another Fund, Cautions Hewitt.

ON AUTOPILOT? DON’T LET INERTIA DRIVE YOUR INVESTMENTS. – Automatic enrollment increases participation rates, but Hewitt’s research indicates that those automatically signed up tend to keep their money invested in a default – and generally conservative – investment choice. The default should be seen as a starting point, not the end all (see AUTO-PILOT – Automatic Enrollment Not Enough to Overcome Inertia.

IT’S OKAY TO TAKE A LOAN. IT’S IMPORTANT TO UNDERSTAND ITS IMPACT – Nearly all 401(k) plans (92%) now offer participant loans, according to Hewitt research. The average principal outstanding amount per participant is $6,900, against an average balance of $57,000. Nearly a third (30%) of those aged 40-49 year-olds have a loan outstanding – and while the money is paid back with interest, participants lose out on market returns on the money.

DIVERSIFY. TAKE ADVANTAGE OF THE FUNDS AT YOUR DISPOSAL – Hewitt research shows that the average 401(k) plan offers 11 investment options, yet 36% of participants allocate their money to a single investment choice. Another 19% invest in just two funds.

DON’T FORGET TO REBALANCE – A Hewitt study found that just 28% of participants surveyed make a trade in their account. Buy and hold is a commendable strategy, but market shifts can tilt the portfolio.

– Nevin Adams editors@plansponsor.com