Workers Cautious about 401(k) Investments

Reuters is reporting (via Yahoo! Finance):

Workers are increasingly cautious about investing in corporate retirement funds, having shifted money out of stocks, reduced how much they contribute and, in some cases, stopped contributions altogether or withdrawn money, according to a study released on Monday.

This is bad news for stock mutual funds as this report is confirming a trend we already knew existed:

Stock holdings now account for 53.8 percent of assets, down more than 14 percentage points from a year ago. The decline reflects both the changes in allocation and the lower value of stock holdings.

Hewitt's analysis included 2.7 million U.S. employees and data collected through October.

INCREASED TRADING

"We're certainly seeing higher trading activity as people got their statements in the mail. The bad news is kind of sinking in," Hess said.

So far in November, balance transfers from equities are up further, with the money transferred to bond and stable value funds, as well as balanced funds, which mix equities, bonds and other assets with an eye toward preserving capital.

New money input into stock funds is also trending lower:

More employers have put in incentives to invest, such as increasing their match, and some workers -- tempted by lower prices -- have increased contributions, she said. However, the proportion of new money dedicated to stocks is at an all-time low, at 58 percent.

Also, another confirmation of trend of increased withdrawals and declining participation rates:

Some employees, especially in economically sensitive sectors like retail, have stopped contributing altogether. Also, since the credit crunch has made borrowing more difficult, more employees are also tapping 401(k)s for cash.

Overall, 6 percent of employees pulled money out, up from 5.4 percent a year ago. So-called hardship withdrawals, in which workers have to meet certain criteria but are still liable for penalties and additional taxes, are up 16 percent. Loans, which often come with low interest rates, are a better option, Hess said.

One factor to watch in coming months, according to Hewitt: More employers may need to reduce their 401(k) matches to conserve cash. In 2002, about 5 percent of companies cut back their matching contributions.

Whether current trends continue depends on the stock market's performance, Hess said.

"Some of the opt-outs could accelerate, the trading activity could accelerate, if markets keep going down. It's starting to scare people that it could be more than just the little dip that we saw back when the tech bubble burst."

This study is presenting some sobering thoughts for those in the industry. Now we know why the asset manager such as the likes of Fidelity are laying off staff due to the market downturn, as declines in asset values lead to lower management fee collections which is a direct hit to revenue.