How upset are the investors who've had the courage to look at their 401(k) balances only to see that they've lost tens or if not hundreds of thousands of dollars? Are they panicking, or even giving up on equity investing altogether?
Not yet, says Martha Priddy Patterson, director of employee benefits policy analysis at accounting firm
Deloitte & Touche. But if the stock market remains at bearish levels much longer, she believes 401(k) investors might begin to voice concern. Here's why Patterson says stock shock isn't causing investors to panic just yet.
TSC: Many 401(k) investors have seen their retirement accounts depreciate by thousands of dollars over the past few months. Are 401(k) plan sponsors concerned about how much of a hit people have taken in their savings, and are any 401(k) investors giving up on the markets? Patterson: They are concerned, and weighing very carefully what their response will be to employees who, in turn, are concerned. But I don't get the great sense that there is panic out there either on the part of employees or the executives running the plans -- yet.
I was at a meeting of 200 human resource and employee benefit executives from leading companies just last week. Depreciation of 401(k) accounts was one of the things I talked about, but no one came up to me and said, "Our people are really panicked," or "We've had quite a backlash."
However, if these down accounts are still down this time next year, then we will definitely hear some real concerns. We've had downturns in the past -- back in 1987, 1992 and 1997 -- and in those downturns, people didn't tend to panic. But remember, those were fairly brief bounces. If we are still seeing a fairly low market for much longer, people will undoubtedly begin to question whether their 401(k) is going to give them the nest egg they are going to need for their retirement.
TSC: Are investors moving their 401(k) money out of equity funds and into more conservative investments such as money markets or cash-equivalent accounts? Patterson: While we don't track this here at Deloitte, I haven't seen any independent data on it.
TSC: Are there any lessons investors can take away from this ugly experience? Patterson: For some investors, the market downturn could almost be a blessing in disguise, because it will help them decide that they need to put more money into their 401(k). Some people may be realizing now that they are not going to meet the goals they thought they were going to meet back when we were routinely expecting returns of 15% or higher.
TSC: But isn't it true that a market downturn could have the opposite effect, convincing some investors that it doesn't pay to put so much of their hard-earned money into the market while it continues to decline? Such thinking could lead some investors to curtail their 401(k) contributions. Patterson: That's true, and that really would be a tragedy. It would also reflect something that has always worried me, which is that many people view their 401(k)s as savings accounts as opposed to their retirement plan. Hopefully, the market downturn will help people realize that their 401(k) really is their retirement plan.
Luckily, almost one out of every four people has both a 401(k) and a defined benefit plan. According to the
Employee Benefit Research Institute, about 22% of employees who have a defined contribution plan such as a 401(k) are also covered by a defined benefit plan such as a pension. In those situations, these people might view the defined contribution money as extra money.
TSC: Can we expect employers to make changes to 401(k) plans as a result of the market downturn, such as offering more conservative investments or more advice? Patterson: They certainly realize this is a good time to review their plans' choices. I expect there will be pressure from the employees for a few more conservative choices, depending upon the plan. Some plans now offer 30 different choices, and out of that, there's likely to be five or six good conservative choices, so there is no need to simply add more. But if they only have nine different choices, they might very well move one or two of those choices into conservative funds.
I think they'll also be looking at offering more financial education, as opposed to investment advice, and be talking more about such basic issues as diversity and appropriate asset allocation, depending upon your age or how much longer you intend to work.
TSC: There's been a movement recently to offer self-directed stock brokerage options in 401(k)s, as well as more sector-type funds. In light of the continued bear market, are employers now rethinking whether to offer such potentially risky investments? Patterson: I think the employers that have them will keep them, only because it would be hard for them to walk away from them now that they're offered, and the employers that don't probably will not adopt them.
Employers have been concerned all along that too many people were almost getting into daytrading with their 401(k) accounts. The
University of Pennsylvania's Wharton School recently issued a three-year study on the frequency of trading in 401(k) accounts that offer online access. They looked at trading 18 months before Web access was made, and 18 months later, and the trading increased dramatically -- by 50%. That's a pretty dramatic statistic.
TSC: Almost 10 years ago, you wrote a book called The Working Woman's Guide to Retirement Planning. But even today, not all women are working and they can be in many different situations, depending on whether they have an income or not, are a mother, are married, unmarried or even divorced. While it's hard to generalize about women, can you say whether women in general are in better financial health today than they were in 1992, when you first wrote the book? Patterson: Women are certainly doing much, much better. Just within the last couple of years, they've begun catching up with men in terms of their 401(k) plan contributions. But being unprepared for retirement is still an issue for all women. And you're right; it's not a one size fits all.
What's true of all women is that they still face greater financial challenges than men. To start off with, women live longer. They still aren't earning as much money as men, and that leads to a triple whammy. One, it means women will not receive as much in retirement benefits as a man because every retirement plan is geared to a percentage of your compensation. Social Security is also geared to a percentage of your compensation. And then, finally, if you are making less money, you have less left over to save in other retirement accounts.
Women are also still changing jobs more frequently than men, so they may be losing out on vesting. The average tenure for a man in a job is 5.3 years, and the average tenure for a woman is 4.7 years. While that's not much difference, guess what? The vesting rule is typically five years, and if the company has a cliff investing policy as opposed to a graduated vesting policy, a woman will lose out.
Unfortunately -- and while it's hard to believe in these days and times -- there are still women out there who think, "Someone will take care of this for me." It's not a good thing for anyone to depend on someone else to provide his or her retirement security.
Lee Barney
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