Big 401(k) Mistakes That Hurt Savings

BOSTON (TheStreet) — A new look at retirement trends by the human resources consulting firm Hewitt Associates (BAC) (Stock Quote: HEW) shows that both inertia and strategic mistakes take a toll when it comes to planning for a secure retirement. Neither the market losses of 2008 nor the robust rally of 2009 have motivated workers to make their 401(k) plans their top priority.

Hewitt's annual study of nearly 3 million employees across 120 large-sized companies reveals that despite the market volatility, only 16% of employees made any sort of fund transfer in 2009, down more than 3%age points from 2008.

(BAC) Average 401(k) plan balances rose significantly in 2009, primarily due to strong market returns. The median rate of return was 24%, after falling 28% in 2008. As a result, average 401(k) plan balances rose from $57,150 in 2008 to $70,970 in 2009. These average balances, however, remain 11% lower than they were in 2007 before the recession. Market appreciation also boosted the portion of stocks employees held in their 401(k) plans from 59% in 2008 to 67% in 2009.

"While it's encouraging that most workers stayed the course, most did so simply because they were disengaged with the retirement saving process or too paralyzed with fear and confusion to touch their 401(k) plans," says Pamela Hess, Hewitt's director of retirement research. "If employees continue to ignore their 401(k) plans, they're hurting themselves by letting the market dictate their retirement strategy."

(BAC) Company matches: Not only are many Americans not taking time to scrutinize asset allocations, they are intentionally shortchanging themselves. About 28% of participants don't contribute enough to their 401(k)s to receive the maximum amount of matching funds from their employers.

(BAC) The finding is surprising given the hue and cry that erupted in recent weeks as companies such as American Express (AXP) , FedEx (FDX) and Starbucks (SBUX) temporarily suspended matching programs.

"It was interesting to watch employee reactions to the match suspension," Hess says. "We had expected some really serious impacts to the savings rates, but it didn't change things as much as we thought."

(BAC) (AXP) (FDX) (SBUX) Although frugality may be at the root of employees' decisions to contribute less, the long-term impact of losing added returns can add up to thousands over the course of a career.

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