September 13, 2008 in Business

Bullish on 401(k)s

By Tim Paradis Associated Press
 

NEW YORK – Workers spooked by inflation, rising unemployment and Wall Street jitters could be forgiven for keeping money in their pockets rather than putting it away for retirement.

Still, many continue to contribute to their retirement accounts. And they’re likely snapping up bargains in the process.

In a review of the more than 2,220 defined-contribution plans it oversees, The Vanguard Group found that the number of workers adding money to vehicles like 401(k)s remained unchanged last year, as did the amount they added. The average worker contribution of 7.3 percent was essentially flat with levels seen in 2000.

Steve Utkus, director of Vanguard’s Center for Retirement Research, said it is encouraging that participation and contribution rates remained steady in 2007.

It also appears that an increasing number of workers are wading into difficult markets by default and perhaps unwittingly following the Wall Street adage about being greedy when others are fearful.

Vanguard said triple the number of plans it oversees automatically enrolled workers in 2007 compared with 2005. The Pension Protection Act of 2006 made it easier for employers to act on behalf of new workers by starting them out in a retirement account rather than waiting for employees to sign up. So some workers who might not otherwise have invested are buying into a beaten-down market. That means they aren’t as likely to miss out on a rebound as investors who decide to wait it out.

While the stock market’s ups and downs are unpleasant for many investors, declines provide an ideal time for workers to add money to a plan like a 401(k). Doing so enables investors to buy stocks on the cheap. And if they have a long time until retirement, buying in a difficult markets makes even more sense.

Some people are trying to take advantage of the sale prices, Utkus said.

“There are some people who are cutting contributions, but if you look at the high-level data it means other people are increasing,” he said.

Barry Glassman, a financial planner and senior vice president at Cassaday & Co. in McLean, Va., said workers rarely miss the dollars taken from their paychecks though they might later agonize when they see their contributions eaten up.

Indeed, it can be hard for investors accustomed to gains to see a reversal. From 2003 to 2007, for example, many workers likely saw increases in their portfolios as the broader market rose.

“Now they may be seeing the third negative quarter in a row,” Glassman said. “The average investor’s first reaction is not to buy, it’s to sell and run to safety. Human nature wants us to sell low and buy high.”

It’s important to maintain a diversified portfolio even in a rough market because beaten-down areas might not recover at the same pace. “We can preach ‘buy low, sell high’ as loudly as we can yet it takes enormous courage for somebody new at investing to check off the box ‘Yes, I want to put money in something that over the prior year lost 10 percent.’ ”

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