First, some good news: On average, 63% of those eligible to participate in their workplace savings plan were signed up and participating in 2006, according to a new report published by Fidelity Investments.
The bad news: 37% still aren't, and that number is higher than it was in 2005.
Every year, Fidelity publishes a report called "Building Futures," in which it analyzes data on more than 10 million people who participate in about 13,000 defined-contribution plans that Fidelity administers. While the commentary that accompanies the report tends to talk up whatever initiatives Fidelity's retirement division happens to be pushing at that particular moment (full disclosure: I once worked for Fidelity), the data in the report itself is widely cited and considered solid -- and indicative of wider trends in the industry.
The highlights
The full report won't be available until this fall, but Fidelity released a few key findings on Wednesday. Among them:
- Plan participants are contributing an average of 7% of their income. While more is always better, this isn't bad, actually -- 7% is enough to collect the full employer match (also known as "free money") in most plans.
- The average 401(k) account balance increased 6.5% to $66,500 in 2006, up from $62,500 in 2005. Without seeing information broken down by age, it's hard to evaluate, but that sounds pretty low, given the stock market's excellent performance in 2006.
- According to Fidelity, "three out of four workers had investment allocations that were not properly diversified for their age, with 22% holding all equities, 13% holding no equities, and 19% having their savings in a single non-diversified investment option." While it's worth noting that Fidelity's idea of "properly diversified" tends to be on the conservative side -- I personally think that "holding all equities" is just fine for someone who's more than seven or so years away from retirement -- those other numbers are troubling.
All your eggs in one basket
Regarding that last bullet point, that 19% figure is particularly worrisome to me. I'm willing to bet that for most of those participants, that "single non-diversified investment option" is company stock. As you probably know, putting more than a little bit of your retirement nest egg in your company's stock may seem like a noble act of loyalty, but it's a bad idea: You already have significant exposure to the company's ups and downs just by working there.
True, your employer may be unlikely to end up like Enron, where hundreds of folks who had put their 401(k) nest eggs into company stock got doubly burned when the firm collapsed and they lost their jobs. But every company suffers setbacks.
Those setbacks were enough to lead employees of several firms, including the Kmart division of Sears Holdings (NASDAQ:SHLD), Alcatel-Lucent's (NYSE:ALU) Lucent division, and Electronic Data Systems (NYSE:EDS), to file lawsuits over steep drops in share prices. That has led some companies, including Bristol-Myers Squibb (NYSE:BMY) and Cigna (NYSE:CI), to loosen their limitations on diversifying away from high concentrations of company stock in their retirement plans. For obvious reasons, it's best to take advantage of opportunities to diversify and reduce your exposure to your employer's stock.
In the highlights released by Fidelity, there's also plenty about the benefits of automatic enrollment and other "auto" features such as defaulting new participants into life-cycle funds and automatically raising contribution rates every year. Those benefits are real -- if you automatically enroll everyone, enrollment is sure to go up -- but so far, relatively few employers have adopted these features (despite Fidelity's best efforts).
What it means for us
Chances are, if you're reading this and you're eligible to participate in a workplace retirement savings plan, you're part of that 63% who is already participating. (If not, call your benefits office right now and find out how to sign up.) If you're also contributing enough to collect all of your company's match and following a well-thought-out asset allocation strategy, congratulations! You're in better shape than many folks. If not, or if you just haven't looked in on your account in a while, consider taking a little time to give yourself a retirement checkup. A little bit of preventive maintenance now can help you retire a lot more comfortably later.
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