Unsteady Economy Prompts 401(k) Strategy Shifts
by JILLIAN MINCER
Wednesday, July 2, 2008
provided by wsj.com


The unsteady economy is altering people's attitudes toward retirement savings.

Some are trimming back their 401(k) contributions as prices for daily staples like food and energy creep higher. Others are boosting savings to better prepare for what could be a costlier retirement.

Not all retirement-savings plans have seen the strategy shift. But a number of retirement-plan providers have noticed the change, which follows an uptick in the past year in the amount of money being borrowed against 401(k)s.

"You get both sides of the equation," says David Wray, president of the Profit Sharing/401(k) Council of America, a not-for-profit association of companies that sponsor plans.

Wray says many families are struggling financially, but "when people look at this kind of economic environment, some say the right thing to do is to save more, protect themselves more."

A survey of baby boomers released in May by AARP, an advocacy group for older Americans, found that 33% have "stopped putting money in a 401(k), IRA or other retirement account."

The report found that older boomers -- those 55 to 64 years old -- are trying to compensate for the recent hit they took on investments by saving more and changing the types of investments. The report says the economic downturn, however, appears "to have caused greater concern and forced greater behavior changes among younger boomers." These 45- to 54-year-olds are having a harder time paying their mortgages and educational expenses and are more likely to postpone travel and major purchases.

Higher costs have forced a growing number of workers in all age groups to decrease their 401(k) contributions.

In the first quarter of 2008, brokerage firm Charles Schwab Corp. says 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.

Charles Schwab found that 5.4% of investors increased their contributions the first quarter of 2008 compared to 7.0% 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."

At the very minimum, he suggests, people should make sure not to miss out on the company match, when employers match the amount that employees save, up to a set amount. He says that 75% of workers who have a 401(k) plan participate, and two-thirds fully utilize the company match.

A report released in May by Financial Engines, an independent investment advice firm, found that 33% of eligible employees fail to contribute enough to their retirement plans to receive the full company match.

The Principal Financial Well-Being Index, which was conducted online this spring, found that 3% of all workers have reduced contributions to their retirement plans to compensate for rising fuel costs.

When asked what they would do to reduce spending in an economic slowdown, 8% said "lower my retirement-plan contribution rate." That's down from 11% in the last quarter of 2007.

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.

She says they've also seen consumers move to more conservative investments, and the firm is getting a lot of questions around the safety of choices.

"We are encouraging people to take a long-term perspective, but they have to be able to sleep at night," Nordquist says.

Robert W. DeMallie, a spokesman for Hartford Life -- a subsidiary of The Hartford Financial Services Group, says he increased his 401(k) plan contribution from 6% last year to 10% earlier this year to 15% in May.

"I want to make sure that I'm preparing really well for retirement," he says. "I have a longer-term view."

Barclays Global Investors also has seen a slight decline in contributions and a shift to more conservative investments.

"They're panicking at just the wrong time," says Fredrik Axsater, head of defined contribution investment strategy at Barclays. "It's usually right after a significant market downturn that you may lose out on a significant upturn."

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