Effects of the Recession on 401(k) Participation

News of gloom and doom in the economy is all around us - so I will not bore you with them. Let us turn our focus instead on what I think are two important shifts in participant sentiment that may be taking place out there:

• Participants are more willing to use their 401(k) accounts as rainy day funds
• Participants in some important pre-retirement and near-retirement demographics are making subtle but significant changes to their participation levels (rates).

BankRate.com is reporting (via Yahoo! Finance): 401(k) hardship withdrawals on the rise (some quotes from Vanguard's Center from Retirement Research, and Hewitt, followed by some pithy remarks on common sense cash management exercises for the entire family):

Cash-strapped employees are turning to their retirement plans as the credit crunch drags on and costs for everyday necessities continue their upward spiral. While hardship withdrawals from 401(k) plans are taken by a very small number of participants -- about 1.5 percent at Vanguard -- the giant fund company says hardship withdrawals have been increasing significantly; up about 17 percent in 2006 and another 9 percent in 2007.

...

Hewitt Associates tracks 1.5 million 401(k) participants at large corporations and says the trend for hardship withdrawals is continuing in 2008, and they don't expect to see that trend change throughout the rest of the year.

The number of loans from 401(k)s are holding pretty steady around 22 percent of participants at any given time, according to Pam Hess, director of retirement research at Hewitt.

Along the same lines, but focusing more on participation levels as opposed to hardship withdrawal issues, the WSJ is reporting today: Unsteady Economy Prompts 401(k) Strategy Shifts. Important takeaways:

• Boomers (55-64 year olds) appear to be saving more to compensate for subpar investment performance
• Yet, according to AARP, 33% have "stopped putting money in a 401(k), IRA or other retirement account." (Presumably this applies to AARP's core audience, but the article does not clarify)
• According to Charles Schwab Corp., "7.1% of active employees reduced their 401(k) savings compared with a 5.2% in the last quarter of 2007 and a 5.8% in the first quarter of 2007."
• "You have higher gas prices, higher food prices, higher college and healthcare costs," says Dean D. Kohmann, vice president sponsor services, corporate and retirement services at Charles Schwab.
  Kohmann says one silver lining is that the current economy is persuading more consumers to get financial advice, which is good long term.
  "The more people have a plan, the less likely they are to reduce [contributions,]" he says. "If you can keep contributing now, you'll have more shares at a lower price."
• Woohoo - more financial planning!
• A bit of good news from Wells Fargo: "Wells Fargo has since January seen customers go in both directions. It found that 30% of consumers who made a change to their contribution rate between January and mid-June decreased their savings -- 15% dropped it to zero.
  However, 70% of those who made a change increased their contribution, says Laurie Nordquist, executive vice president of Institutional Trust Services for Wells Fargo."