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CCH® PENSION AND BENEFITS — 12/30/08

Employees choosing safer 401(k) investments, Hewitt survey finds

Employees are reacting to the recent declines in the stock market by moving 401(k) plan assets into less risky investment funds, according to a recent analysis by Hewitt Associates, a global human resources consulting and outsourcing company.

Despite downturn, employees continuing to save

The Hewitt study found that, despite the recent market upheaval and poor investment returns, employees are staying the course and maintaining a long-term focus on retirement saving by continuing to invest in their 401(k) plans. However, some are reacting by moving 401(k) assets into less risky investment funds. Further, tight economic times are prompting more employees to tap into their retirement savings in the form of hardship withdrawals.

Hewitt’s analysis of 2.7 million U.S. employees reveals that the average 401(k) plan balance has dropped 14% in 2008 to $68,000, down from $79,000 in 2007. In the past two months alone, employees, on average, have lost nearly 18% of their 401(k) plan savings, and some have lost more than 30%.

However, despite the significant market declines, savings rates have dropped only marginally, from 8% in 2007 to 7.8% in 2008. Just 4% percent of employees have terminated their 401(k) plan contributions altogether.

Amount held in equities at an all-time low

Some employees are reacting to the market’s rollercoaster fluctuations by adjusting their investment mixes and moving money into less risky funds. The amount of 401(k) assets held in equities is at an all-time low. Hewitt found that only 53.8% of assets, on average, were invested in equities in 2008, compared to 68.1% a year ago and down from its high of 74.2% in 2000.

In addition, while the number of employees making trades has risen slightly—19.3% verses 18.7% in 2007—the amount of 401(k) assets being transferred has been significantly higher. To date, 5.3% of employees’ 401(k) savings has been traded, compared to 3.5% in 2007. In October 2008 alone, 1.25% of employees’ 401(k) balances were traded, almost three times the historical average.

“401(k) plan balances are taking an obvious hit in the current market environment, but it’s encouraging to see that most employees are sticking to their long-term investment strategy and not making rash decisions that ultimately could derail their retirement goals,” said Pamela Hess, director of retirement research at Hewitt Associates. “The concerning behavior we are seeing, however, is some evidence of knee-jerk investment decisions, with a significant increase in the number of investment transfers immediately after the market drop,” she added.

Hardship withdrawals show increase

Despite stable 401(k) savings rates, Hewitt’s data shows an uptick in the number of employees tapping into their 401(k) plans. More than 6% of employees withdrew money from their 401(k) plans in 2008, up from 5.4% in 2007. The increase is due to an upsurge —16% — in hardship withdrawals. Some firms in industries that have been especially hard-hit by the economy have been experiencing hardship withdrawals in excess of 10% of their population—nearly 9 times more than the average 401(k) plan. However, 401(k) loan activity has remained consistent, with 22% of employees currently having a loan outstanding.

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