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Many investors would just as soon forget last year, and for good reason -- the downturn ravaged 401(k) account balances. But the more important issue is whether workers are doing the right things in response to a terrible 2008.

Another look at 401(k) plans
Recently, 401(k) administrators have reported about what their participants have done with their money lately. After Fidelity released its quarterly report a couple of weeks ago, Vanguard followed suit last week with its look at 2008 data from its 3 million customers across 1,800 plan sponsors.

The report included a lot of good news. Here are some positive signs for workers:

  • Muted losses. Even with the stock market down sharply, account balances for continuous 401(k) plan participants in 2008 fell less dramatically -- about a 14% loss at the median, with a third of plan accounts actually staying flat or rising in value.
  • Higher automatic enrollment. The number of plans offering automatic enrollment into quadrupled from 2006 levels, with most of those plans opting for some form of balanced investment option as their default rather than a money-market fund.
  • Target-date fund popularity rising. About 70% of plan sponsors offered target-date funds in 2008, with more than a third of eligible participants using them.
  • Active trading levels low. Only one out of every six participants traded in their 401(k) accounts in 2008.
  • Participants got smarter. Most employees avoided risky practices like owning too much employer stock, taking 401(k) loans, and opting for cashing out rather than rollovers when they switched jobs.

But hold off before you count the 401(k) problem solved for good. Workers have a long way to go before they should feel safe about their plan accounts.

Not saving enough
Perhaps most revealing about the report was how little most people have in their 401(k) plans. Vanguard's average balance was $56,000, while half of all participants had $17,400 or less in their accounts. Only 15% had account balances of $100,000 or more. Even with many young participants, those numbers aren't encouraging.

Moreover, most people didn't save a big percentage of their salary. More than half of participants saved 6% or less, while only a fifth set aside 10% or more of their earnings to their 401(k).

Making the wrong investments
In addition, 401(k) participants don't always invest well. For instance, only small percentages of workers invested in small-cap or international funds. Those numbers don't include the allocations to those assets in target funds, though, so the numbers aren't quite as discouraging as they appear.

In contrast, what workers do buy is employer stock. More than half of those who can buy shares do so. And while a vast majority of them -- 80% -- have 20% or less of their 401(k) invested in it, numbers from outside Vanguard suggest the problem is much more serious at some companies. For instance, look at how much workers at these companies have in company stock:

Company

Plan Assets Invested in Company Stock

ExxonMobil (NYSE: XOM  )

71%

General Dynamics (NYSE: GD  )

37%

Wells Fargo (NYSE: WFC  )

43%

Duke Energy (NYSE: DUK  )

37%

Kroger (NYSE: KR  )

42%

Lockheed Martin (NYSE: LMT  )

27%

Coca-Cola (NYSE: KO  )

54%

Source: Brightscope.

Given how much workers already rely on their employers for their salary, pension, and benefits, putting a big slug of money into company stock leaves you dangerously reliant on your company's survival. That's a risk you probably shouldn't take.

A fair snapshot?
Although 401(k) statistics are interesting, you should take them with a grain of salt. Many people make big investments outside their 401(k)s that can change things dramatically.

But you can still take a few lessons from the report:

  • Take charge. Don't just rely on your plan's default choice. Look into your investment options and choose the ones that make sense for you.
  • Save more. The thing you have the most control over with your retirement nest egg is how much you set aside from your paycheck. The more you can live without now, the more you'll have later.
  • Don't panic. It appears that whether it was simple inertia or conscious choice, most participants stayed the course throughout last year's panic. Stick with your long-term investing plan and you should also come out ahead in the long run.

Your 401(k) is one of the most valuable tools you have for retirement. Make the most of it, and you'll get the results you want.

Should you get out of stocks now before it's too late? John Rosevear has the answers you need right here.

Fool contributor Dan Caplinger isn't looking to retire anytime soon, but it's by conscious choice. He doesn't own shares of the companies mentioned in this article. General Dynamics and Coca-Cola are Motley Fool Inside Value recommendations. Duke Energy and Coca-Cola are Motley Fool Income Investor selections. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy wants you living in that penthouse apartment across the street from its own swanky pad.


Read/Post Comments (2) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 25, 2009, at 12:32 PM, sharkey94 wrote:

    I find it interesting that the author of this article does not mention that companies often purchase company stock with the company-match portion of your 401K. You can not move it until you are fully vested in your 401K. So the % of company stock that employees own is always going to look high until you have a choice on where this company match funds are invested.

  • Report this Comment On August 28, 2009, at 12:58 PM, robertf36009 wrote:

    Excellent article as far as it goes, hat tip to the author. While the information provided in the article is factual and important individual investors today have multiple investment vehicles available to them. Many of these options can be used to complement each other and improve overall returns. In addition to the traditional 401K plan many companies offer a Roth option which can provide tax free returns in retirement. Many companies offer a matching contribution which employees would be well advised to take maximum advantage of. Never leave free money on the table. By adding a Roth IRA to your strategy you may get added diversity through a managed account that is essentially a set and forget type investment with the same tax advantage as the Roth 401K. Most of these IRAs have three components: A money market, a savings share account and the IRA itself. The money market serves as a cash receptacle and dispersal system. The share savings account allows the investor to withdraw cash for emergencies or other uses without penalty and the IRA portion is the retirement account subject to rules governing withdrawals including penalties for early withdrawal. A straight savings account at a local bank or credit union is a good idea as well as it allows you to save for discretionary items at a modest return while making it less likely you will raid your IRA money market or share savings account for these items. Lastly there is the brokerage account such as E-Trade or Ameritrade which allow small investors to purchase individual stocks, bonds and ETFs. Not all plans allow bond trading and many that do have a large up front cost so they are not for every one. However if an investor is willing and able to research stocks on their own or with help from The Fool and others the experience can be profitable and intellectually rewarding. This type of investing gives the individual the most control of their investment dollars allowing the individual the opportunity to speculate on long shots or stick with safe dividend paying blue chips. By allocating resources to all of them your retirement nest egg is assured of a level of diversity which can not be achieved in any other way. So as always do your due diligence, keep your traveling stops tight and keep your stash of cash in gold.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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