Posted on: Thursday, June 2, 2005

Too few saving enough in 401(k)s

By Sandra Block
USA Today

Traditional pensions are disappearing, and unlike the ivory-billed woodpecker, they probably won't reappear someday in a remote section of Arkansas.

About 64 percent of employers surveyed by Hewitt Associates, a human resources consulting firm, said their 401(k) plan was their primary retirement vehicle, up from 55 percent in 2003. And 27 percent of companies that have a traditional pension plan said they were likely to freeze participation in their plans for workers hired in 2005.

Yet at a time when workers are being asked to take responsibility for their retirement security, many workers aren't saving enough. And those who are saving aren't managing their investments very well, the Hewitt study suggests.

Signs of trouble in 401(k) land:

• Lopsided portfolios. Workers at Enron and WorldCom saw their retirement plans go up in flames when their companies collapsed. But that hasn't stopped other workers from betting their future on their company's stock.

More than a quarter of plan participants had 50 percent or more of their savings in company stock last year, the Hewitt study found. Even scarier, nearly 14 percent of workers had more than 75 percent of their savings invested in company stock. Most financial advisers recommend investing no more than 10 percent of your savings in any single stock, including your employer's.

Employees may favor company stock because they may be "unsure about their ability to manage their portfolio using diversified funds," says Lori Lucas, director of participant research at Hewitt. Company stock, she adds, "seems safer to them."

But investing a large percentage of your savings in your own company is anything but safe. If your company runs into financial problems, both your paycheck and your savings are jeopardized, Lucas says.

Inertia is another problem, Lucas says. Many companies match 401(k) contributions with shares of company stock. If those matching shares perform well, the stock will gradually occupy a larger portion of the employee's 401(k).

You can avoid that problem by periodically rebalancing your 401(k) plan, Lucas says. Since the Enron collapse, many companies have made it easier for workers to sell company stock in their 401(k) plans and reinvest the money in other funds. Yet not many workers are taking advantage of the change. In 2004, only about 17 percent of workers made any transfers in their plans, the Hewitt report said.

• Errant lifestyle funds. Lifestyle funds, also known as target funds, automatically allocate your investments, based on when you plan to retire. As you get closer to retirement, your fund's portfolio becomes more conservative.

Investors in these funds don't have to worry about picking the right funds or rebalancing their portfolios. And lifestyle funds have caught on: In 2004, nearly 40 percent of workers who were offered lifestyle funds in their plans invested in them, the Hewitt report said.

But only 15 percent of those investors used the funds as intended. The majority of savers invested in lifestyle funds in combination with other mutual funds, the report said.

"They appear to be mistaking a lifestyle fund for another core investment fund, not understanding that within itself, it's a diversified portfolio," Lucas says.

Used properly, lifestyle funds let investors diversify their investments and avoid the temptation to chase the hottest sector, says Charles "Ed" Haldeman, chief executive of Putnam Investments, which offers several lifestyle funds. But to get the full benefit, investors should put all their 401(k) savings in the fund, he says.

The news wasn't all bad. The percentage of eligible workers participating in company 401(k) plans rose to 70.3 percent in 2004, up from 69.8 percent in 2003. Average 401(k) plan balance rose 21 percent to $69,000.

But the median plan balance was just $25,640 in 2004. (Median means half were higher, half lower.) Because the average can be skewed by large plan balances, the median is a more accurate gauge of how much money typical workers are saving.

Younger workers, who also face proposed cutbacks in Social Security benefits, are saving even less. Only 46 percent of workers ages 20 to 29 participated in their company's 401(k) last year, the Hewitt report said. And most younger workers who participated had balances of less than $5,000.

Workers in general, and young people in particular, simply aren't contributing enough, Lucas says. "That was perhaps the most disturbing finding in the report."