Keeping the 401(k) faith

Well, you already knew the bad news about your 401(k), but now we have some more specifics about the misery all around you: The median rate of return on 401(k) balances was negative 28.3% last year, according to a study released today by human-resources consulting firm Hewitt Associates. The average 401(k) balance dropped from $79,600 at year-end 2007 to $57,200 at the close of 2008.

Now for the good news: Getting burned by last year's trauma does not appear to have shaken people's belief that it's a good thing to save for retirement. Seventy-four percent of employees participated in their 401(k) plan last year, says Hewitt, roughly the number as did the year before.

And yet, and yet....People are losing their nerve at the margins. The average employee contribution rate last year, says Hewitt, was 7.4%, down from 7.7% the prior year. (In 2004 and 2005, the rate was 7.9%.) Meanwhile, mutual-fund-and-401(k) giant Fidelity--which earlier this year said that average retirement contributions, by dollar amount, had increased slightly in 2008--released numbers today indicating dropoffs in employer and employee contributions in the first quarter of 2009. On average, workers socked away $1,700 pre-tax dollars in their 401(k)s in the first quarter of the year, down 9% from the corresponding quarter one year earlier. Total contributions (that is, employee deposits and employer matches) amounted to $2,780, down 10% from one year earlier.

To what extent the falling dollar amount reflects lower salaries or lower contribution rates is unclear. But what is clear is that workers' allocations to equity are falling--not just because falling stock prices did it for them, but also because they're making the decision for themselves. Hewitt suggests that the biggest-volume days for trading out of stocks were the days that followed the market's biggest drops (averaging negative 4%). Stable-value funds experienced an 11% increase in asset allocation. The average percentage of 401(k) portfolios allocated to stock dropped to just 59%--the lowest figure since Hewitt began tracking that number in 1997. (In 2005, for purposes of comparison, the share in equities was nearly 68%.)

Of course, some of the pullback from stocks may reflect not a vain attempt at return-chasing (or return-fleeing), but a reasoned reassessment of one's risk profile. And some of the cutbacks in retirement savings may reflect not despair, but urgent current needs for cash. But if you've been cutting your retirement allocation and giving up on stocks, you might at least ask yourself the questions: If investing in stocks in your 401(k) was a great idea a year ago, isn't it even a better idea today, when stocks are a lot cheaper and you don't have the assets saved up that you used to?