Monday, July 21, 2003
Many workers do not realize the dangers of giving them up.
BALTIMORE SUN
Workers loved their 401(k)s in the 1990s. They put money in and watched it grow. But when stock prices began their steep descent three years ago, the plans suddenly didn't seem so rewarding. Money that went in seemed to disappear.
For that reason, and others related to the recent economic decline, workers' commitment to this widely offered retirement savings plan appears to be weakening, recent research indicates.
But giving up on a 401(k) plan would be a huge mistake, experts said. Financial security in retirement requires regular investing, and for many Americans a 401(k) is not only the easiest way to do that, but it also may be the only retirement plan offered by their employer, experts said.
Younger workers
Particularly worrisome to retirement experts is an apparent falloff in 401(k) savings by younger workers.
A recent survey of 330,000 workers found that 68.2 percent contributed last year to a 401(k), a drop from 71 percent in 2001, according to Hewitt Associates, a Chicago consulting firm.
Those in their 20s and with two years or less on the job were most likely not to contribute, Hewitt said.
The average contribution rate among younger and newer workers fell slightly last year, too, as workers reduced or stopped contributions, Hewitt found.
The decline is a reaction to the market downturn, the negative view of 401(k)s after corporate bankruptcies and job insecurity, said Lori Lucas, a Hewitt consultant.
"The issue is how long will it take for those employees to regain confidence in the market and 401(k) plans," she said.
Employer contributions
There's another potential threat to 401(k) participation and workers' retirement savings.
Thousands of workers are learning firsthand that the matching contributions that employers make to their accounts are voluntary.
Some companies, including Charles Schwab & amp; Co., Ford Motor Co., Prudential Securities and DaimlerChrysler AG, suspended their matches to save money, although they said they will review the decision later, reports the Center for Retirement Research at Boston College.
"I've always had a lot of concern about 401(k) plans before the onset of the bear market, mainly because they shift so much of the responsibility from the employer to the worker," said Alicia Munnell, the center's director. "It requires just more skills than most people have. I view this suspension of the employer match as one more problem with 401(k)s."
Munnell worries that the loss of a company match will discourage new workers from joining a 401(k). And if matching contributions are permanently eliminated, affected workers will end up with substantially less money at retirement because they likely won't increase their contributions to make up for the loss, she said.
Majority use
Still, the 401(k) will likely remain the major savings vehicle for many workers, and experts advise taking advantage of the tax-favored plan. Money goes into the plan before taxes are paid, investments grow tax-deferred and eventually ordinary income tax is paid on the money at the time of withdrawal.
"It's easy. It's a payroll deduction," said J. Michael Martin, a financial planner with Financial Advantage Inc. in Columbia, Md. "If you don't save for the future, there isn't going to be any. You can't borrow for your retirement. Who is going to lend you any money?"
Planning ahead
Martin suggests workers figure how much they will need in retirement, a great motivator to save. There are plenty of online calculators, including one from the American Savings Education Council at www.asec.org.
There are other steps workers can take to improve their retirement savings, which studies indicate they are not doing.
One is to regularly rebalance portfolios. Once workers make the initial decision of how much they want in stocks and bonds, they typically don't make any adjustments later and, in essence, the market dictates their holdings, Lucas said.
For instance, a worker who wants half her money in stocks and the rest in bonds could wind up with 70 percent in stocks if the market skyrockets. By rebalancing, she would transfer money out of stocks and into bonds to return to a 50-50 split.
Workers also should avoid owning too much of their employer's stock, which many still do despite all the headlines about workers who lost both their jobs and retirement savings when their company went belly up. Hewitt found that when employees owned company stock in a 401(k), those shares on average made up 42 percent of balances.
Martin recommends that employer's stock should not make up more than 10 percent of an entire portfolio, including investments outside the 401(k).