EBRI Reports on the State of 401(k) Plans

They’ve only been part of the investment landscape for three decades, but 401(k) plans have grown to be the most widespread private-sector employer-sponsored retirement plan in the United States. In 2011, an estimated 51 million American workers were active 401(k) plan participants – and the $3.2 trillion in 401(k) plan assets represented 18% of all retirement assets.

If you’ve ever wondered how your 401(k) investment decisions compare to other investors’ approaches, the Employee Benefit Research Institute (EBRI) provides all the detail you need in the recently published 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011. It’s a report EBRI publishes each year in collaboration with the Investment Company Institute (ICI).

On average, at year-end 2011, 61 percent of 401(k) participants’ assets was invested in equity securities, including equity funds, the equity portion of balanced funds, and company stock. Fixed-income securities, including stable-value investments and bond and money funds accounted for 34 percent.

As in previous years, participants’ asset allocation varied considerably with age. Younger participants tended to favor equity funds and balanced funds, while older participants were invested more heavily in fixed-income securities such as bond funds, GICs and other stable-value funds, or money funds. Among participants in their 20s, the average allocation to equity and balanced funds was 75 percent of assets, compared with 50 percent of assets among participants in their 60s.

Younger participants also favored target-date funds that pursue a long-term investment strategy using a mix of asset classes that follow a predetermined reallocation, typically shifting in focus from growth to income over time. At year-end 2011,13 percent of 401(k) assets in the database was invested in target-date funds. Participants in their 20s had 31 percent of their 401(k) assets invested in target-date funds, compared to just 11 percent for participants in their 60s.

Balanced funds have also become increasingly popular with younger investors. At year-end 2011, 51 percent of the account balances of recently hired participants in their 20s was invested in balanced funds, compared with 44 percent in 2010, and just 7 percent in 1998.

In another ongoing trend, company stock continued to represent a small plan allocation, remaining at an average of 8 percent in 2011, across all age groups. This share has fallen by more than half since 1999.

To make the most of your 401(k), contribute enough to secure your company’s match and increase your savings as your salary increases. Also, take advantage of catch-up provisions if you are over age 50 and, if you change jobs, rollover your account.

401(k) Plans Hit the Big 3-0

It’s been three decades since the 401(k) arrived on the retirement saving scene. And to celebrate the tax-deferred account’s milestone, many U.S. companies that eliminated their 401(k) matching contributions during the Great Recession are beginning to restore this valuable benefit.

According to the consulting firm Towers Watson, during the recent recession, almost one in five U.S. companies with at least 1,000 workers suspended 401(k) matching contributions. Now, many of those companies are reinstating the perk – albeit often at a reduced level. Today, the once standard 3% match is considered generous. In addition to offering smaller matches, some companies are linking their contributions to corporate profits or requiring employees to reach a particular dollar level in their account before any matching occurs.

With traditional pension plans going the way of the drive-in movie and concerns mounting over the long-term health of Social Security, 401(k) accounts are a critical leg to the retirement stool. According to the Employee Benefit Research Institute (EBRI), 79 percent of eligible workers (36 percent of all workers) say they participate in retirement savings plan with their current employer. Furthermore, 28 percent of participants report that they have increased the percentage of their salary that they contribute to the plan in the past year, and just 4 percent report they decreased the percentage. EBRI also found that workers who currently participate in this type of plan are more than twice as likely as those who do not to report retirement savings and investments of at least $50,000 (52 percent vs. 23 percent).

While 401(k) participation levels have certainly increased since the plan’s introduction and held steady even throughout the recent financial crisis, the industry can do a better job with education. In fact, EBRI found less than half of workers (42 percent) report they and/or their spouse have tried to calculate how much money they will need to save to secure a comfortable retirement. Disappointingly, this percentage is lower than the 53 percent recorded in 2000 and the 47 percent in 2008.

Take Maximum Advantage of Your 401(k)

I always tell my clients not to leave money on the table, but according to a recent 401(k) study, many American employees are doing just that. In fact, of the 2.8 million 401(k) participants Financial Engines surveyed, 39 percent were not saving enough to receive their employer’s full matching contribution (or they weren’t saving at least 5 percent of salary in companies with no match). That figure is up from 33 percent in 2008. Younger workers (presumably with lower salaries) are most likely not to secure the free cash: 53 percent of participants under age 30 did not save enough to receive the full match. That percentage dropped to 47 percent for participants under age 40.

And while my standard advice for retirement saving is to max out your 401(k), only 6% are saving within $500 of their annual pre-tax IRS limits, down one percent from 2008.

According to Financial Engines, the key to participant savings comes from automatic escalation, where a participant’s savings rate is increased automatically on an annual basis to a pre-determined maximum. Sixty-seven percent of participants in plans with automatic escalation save enough to receive the full employer match, compared to just 52% of participants in plans without automatic escalation.

Remember, increasing your 401(k) contribution as your salary increases is especially important given the fact that many companies eliminated 401(k) matches during the recession. So you may have some catching up to do.

New IRS Rules Ease 401(k) Stock Sales

New rules approved this May by the Internal Revenue Service require 401(k) providers to offer participants at least three investment alternatives to company stock. Most plan providers do this anyway, but the new rules also address the common corporate policy of disallowing employees from selling or diversifying out of company stock except at certain times.

The new rules, which take effect immediately and apply to plan years beginning on or after January 1, 2011, require plans to allow company participants to exit out of company stock as quickly and easily as they can move out of other investments in the plan.

There was a time was when I typically saw an over-concentration in company stock in the portfolios of new clients. After all, the option of investing in company stock, often at much lower prices than other investment options, can seem like a bargain. And we are all prone to look through rose-colored glasses when it comes to evaluating the prospects of the company we work for.

Today, thanks to the lessons of the tech bubble and companies like Enron and Bear Stearns, I see less "company stock tunnel vision." More investors understand that over-concentrating in one stock can be risky. In fact, a recent study by the Employee Benefits Research Institute (EBRI) shows that the share of 401(k) accounts invested in company stock has seen a steady decline since 1999, falling by nearly 1 percentage point to 9.7 percent by the end of 2008.

If you would like to discuss the allocation of your 401(k) plan, please feel free to contact me.