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July 10, 2001
401(k) Accounts Have Begun Losing Money
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The losses came despite an increase in contributions last year.
And they continued in the first half of this year, despite some strengthening of stock prices in the last couple of months, the Times reports.
The trend exposes years of mistakes by employees, raises some questions about proposals to permit Americans to manage part of their Social Security accounts, and puts in doubt the future of many employees' nest eggs for retirement, according to the newspaper.
Some workers have begun second-guessing themselves, since they are the ones who decide how much to contribute to 401(k) plans and how to invest their money.
There are some risks that people cannot control, such as stock market declines and company contributions that shrink with profits.
Yet a look at shifting account balances over the last decade shows that many people:
- Have grown overly dependent on stocks.
- Do not contribute enough to allow them to retire on the dates they planned.
- Put too much into a single, aggressive mutual fund or their own company's stock.
Another important finding: Relatively few employers offer much in the way of useful guidance.
Investing too aggressively?
The average account shrank to $41,919 in 2000 from $46,740 in 1999, according to a report from Cerulli Associates, a benefits consulting firm.
Although comprehensive 401(k) account data will not be available for some time, the average account has since shrunk about $600 more, to about $41,300, according to a rough projection by one Cerulli analyst.
The average 401(k) account had 72 percent in stocks and stock funds in 1999, according to the latest data available from the Employee Benefit Research Institute, a Washington nonprofit group.
That stance, according to the Times, reverses the conservative posture of investors a decade ago. It also appears aggressive when compared with the classic allocation of professional pension plan managers: 60 percent in stocks and 40 percent in bonds.
More recent information from Fidelity Investments, which handles a mix of small and large employers' plans as the nation's largest 401(k) administrator, shows an even more aggressive posture.
The average Fidelity account had 19 percent in company stock on top of almost 62 percent in stock funds at the end of last year. Owning a large amount of a single stock is riskier than owning an aggressive stock fund since so much rides on the fortunes of one company.
The Times cautions that this is not to say any particular worker should abandon stocks or pile into bonds, or that the typical pension fund mix should be copied by workers of various ages and incomes.
Moreover, most pension funds have faced losses as the market has declined. But professional pension trustees work zealously to balance risk and reward in traditional pension plans, and workers also need to have a strategy and stick to it, financial planners say.
Some checks won't be there
Beyond averages, there are signs of many flawed individual choices. Between one-fifth and one-quarter of workers eligible for 401(k) plans do not participate at all, according to the Profit Sharing/401(k) Council.
And while financial planners warn that those close to retirement should take fewer risks with their money, they note that some young people with the longest time frames and the most ability to withstand market shocks invest too conservatively.
At the same time, many baby boomers are behind in their savings, a deficiency the Bush administration tried to help address by significantly raising, in the tax bill recently approved by Congress, the maximum contributions and permitting those over 50 to contribute even more to catch up while they can.
At another extreme in risk, workers at big companies are overly reliant on company stock. The average account at Hewitt Associates, the nation's second-largest 401(k) provider, which caters to Fortune 500 companies, has almost 30 percent in company stock.
"I don't know where this is going to lead us over the next 10 or 15 years, when these people start retiring," said Roy T. Diliberto, a Philadelphia financial planner and the chairman of the Financial Planners Association. "Some checks are not going to be there."
Some companies reduced matching contributions last year as profits declined. About one-third of the companies that offer 401(k) plans link their contributions to their profits. Most add a variable bonus to a fixed contribution, while others contribute no money if there are no profits. Some employees may see their matching contributions reduced this year or next.
Employees may be putting more into their 401(k) plans during this period of stock market weakness, but overall contribution rates will still leave many workers far short of their retirement goals, the Times estimates.
At accounts run by the Vanguard Group, the nation's fourth-largest 401(k) administrator, contribution rates rose from 7 percent of pay for the average worker in 1999 to 8.2 percent in May. But Vanguard estimates that a couple with an income of $50,000 that expects to retire in 30 years needs to contribute 15 percent to maintain its standard of living without a regular pension.
"Most people now are contributing at 8 percent, and with the company match added it might be 11 percent," said William McNabb, who oversees retirement services for Vanguard. "That gives you a 4 percent shortfall."
"Whether people have enough money or not when they retire is going to be the critical issue in determining whether this experiment worked," he said.
Where early 401(k) plans might have had a handful of mutual funds, some large companies now offer more than 100 funds and even brokerage accounts that permit employees to trade stocks.
"People are not doing a good job picking portfolios," said Shlomo Benartzi, a professor at UCLA and a co-author of a study on such plans. "If you give people too many choices, you can get them confused."
Employers have certain legal obligations, such as monitoring their plans' investment options and providing educational materials. But only in the last few years has a crop of independent companies arisen to address one of the most critical problems: helping employees figure out how to invest.
Employers, however, are beginning to turn to companies like Financial Engines of Palo Alto, Calif., and Morningstar of Chicago to create automated tools that give advice to workers; Fidelity has created a similar service. But the advice given by different services can vary considerably, according to the Times, and their overall utility remains to be seen.
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