Employees are gradually returning to the idea of feeding their 401(k)s. In each of the previous three quarters, Fidelity reported that six percent of its 11.2 million plan participants cut their 401(k) contributions, but in the three months ending June 30, the tide turned. During that period, 4.7 percent boosted their contributions and three percent decreased them. Most people left their contributions unchanged, so they continued to buy securities while they were on a fire sale.
Unfortunately those who stopped adding to their 401(k) lost out on the 15 percent upswing in the S&P index in the second quarter, but the rally could continue since economists are now predicting the end of the recession. Fidelity reports that the average individual account balance rose 13.5 percent in the second quarter to $53,900. This was primarily due to stock price increases, but additional contributions were also a factor.
One thing that did change were the allocation of contributions into stock-based funds. Fidelity said that only about 68 percent of contributions went into stock based funds in the first half of this year while that level was about 75 percent in previous years. So, investors did exercise more caution in their investment choices.
During the recession some employers cut back or discontinued their 401(k) contributions, but Fidelity found that among the employers using their plans 90 percent continued to make contributions at the same level.
Contributions do vary by age:
* Only 44 percent of people eligible in their 20s participate in their 401(k) plans. They're losing a lot of time for growth in their retirement portfolios and will never be able to get that time back.
* 65 percent of people eligible in their 30s and 40s do participate, but 23 percent of that group borrow money from the plan for a home, child's education or financial emergency. If they fail to repay those loans, they can face penalties and pay income taxes on the money withdrawn.
* 70 percent of people over 50 who are eligible participate in their 401(k)s, but more than 11 percent had no exposure to stocks. That reduces their chances that their portfolio will be able to keep pace with inflation. They could actually be losing value each year when inflation returns. Studies done by the American Association of Individual Investors have shown that a 50/50 mix is a good one through most of retirement. Remember, people are living 20 years or more in retirement and don't want to run out of funds.
So what did you do during the downturn? Did you add money to your 401(k) or stop making contributions?
Lita Epstein has written more than 25 books including Working After Retirement for Dummies and The Complete Idiot's Guide to Value Investing.