Workers cautious about 401(k) investment: study

NEW YORK (Reuters) - Workers are increasingly cautious about investing in corporate retirement funds, having shifted money out of stocks, reduced how much they contribute and, in some cases, stopped contributions altogether or withdrawn money, according to a study released on Monday.

The study by Hewitt Associates, which administers 401(k) plans for corporations, found the average U.S. 401(k) plan balance was down 14 percent through October to $68,000 from $79,000 in 2007.

401(k) refers to a section of the U.S. Tax Code that allows retirement plan investors to defer paying taxes.

Hewitt, a human resources consulting and outsourcing firm, found 4 percent of workers had stopped contributing to their plans in response to the declines on Wall Street, and fewer are investing in stocks.

Many people moved money into safer assets after particularly bad days in the stock market, said Pamela Hess, Hewitt's director of retirement research.

"I see people that are very unsophisticated moving to cash, but I also see people who believe themselves to be sophisticated trying to time the market," she said. "If you get out just after it goes down, those people are guaranteeing they don't get the upside."

Stock holdings now account for 53.8 percent of assets, down more than 14 percentage points from a year ago. The decline reflects both the changes in allocation and the lower value of stock holdings.

Hewitt's analysis included 2.7 million U.S. employees and data collected through October.

INCREASED TRADING

"We're certainly seeing higher trading activity as people got their statements in the mail. The bad news is kind of sinking in," Hess said.

So far in November, balance transfers from equities are up further, with the money transferred to bond and stable value funds, as well as balanced funds, which mix equities, bonds and other assets with an eye toward preserving capital.

About 71 to 72 percent of eligible U.S. workers contribute to 401(k) plans, down about 2 points since the start of the year, according to Hewitt. On average, they set aside 7.8 percent of their pretax earnings for retirement investments, down slightly from 8 percent in 2007.

"I was surprised that number didn't go down more," Hess said.

More employers have put in incentives to invest, such as increasing their match, and some workers -- tempted by lower prices -- have increased contributions, she said. However, the proportion of new money dedicated to stocks is at an all-time low, at 58 percent.

Some employees, especially in economically sensitive sectors like retail, have stopped contributing altogether. Also, since the credit crunch has made borrowing more difficult, more employees are also tapping 401(k)s for cash.

Overall, 6 percent of employees pulled money out, up from 5.4 percent a year ago. So-called hardship withdrawals, in which workers have to meet certain criteria but are still liable for penalties and additional taxes, are up 16 percent. Loans, which often come with low interest rates, are a better option, Hess said.

One factor to watch in coming months, according to Hewitt: More employers may need to reduce their 401(k) matches to conserve cash. In 2002, about 5 percent of companies cut back their matching contributions.

Whether current trends continue depends on the stock market's performance, Hess said.

"Some of the opt-outs could accelerate, the trading activity could accelerate, if markets keep going down. It's starting to scare people that it could be more than just the little dip that we saw back when the tech bubble burst."

(Reporting by Nick Zieminski; Editing by Lisa Von Ahn, Brian Moss, Dave Zimmerman)