Losing Altitude
The 401(k) has hit hard times, as account balances fall, companies cut back, and workers grow disenchanted
Cleve Mesidor began investing in a 401(k) in the late 1990s because she "had no faith in Social Security." But after the bear market erased more than half her nest egg, leaving her with less than $5,000, the 29-year-old lost faith in her employer-sponsored retirement plan as well.
So last spring, Mesidor, who had been socking away 7 percent of her paycheck into a 401(k), did something that a small but growing number of workers have begun to do: She stopped contributing to her retirement account. "To watch my investments dwindle and dwindle was just heart-breaking," says Mesidor, a communications officer for a Washington, D.C., health advocacy group.
The money that had flowed into her tax-deferred 401(k) now goes into a credit union savings account, earning about 1 percent. Mesidor is looking into putting some money into a certificate of deposit, saying: "I don't think I'll be getting back into a 401(k) for a very long time."
Only recently hailed as Wall Street's great democratizer and the fuel for the working man and woman's retirement dreams, the 401(k) today is being waylaid by a combination of market forces, a slumping economy, and rising investor frustration. It doesn't help, either, that a growing number of companies have been cutting back on their matching contributions to the plans. Nowhere is this new zeitgeist more evident than in bookstores, where 1999's bestseller The 401(k) Millionaire has given way to The Great 401(k) Hoax.
Though the vast majority of eligible workers continue to plow money into these tax-deferred retirement plans, the average 401(k) balance fell from $50,230 in 1999 to $45,634 last year, according to a study by the Vanguard Group, in large part because of market losses. "If 2003 is another negative year [for stocks], it's going to be very detrimental to our entire retirement system," says Ted Benna, a benefits consultant who created the first 401(k) in 1980. Clearly, the bull market oversold the power of 401(k)'s. "We thought that investing in a 401(k) was like flying an airplane," says William Arnone, director for employee financial education at Ernst & Young. "Now we understand that it's more like riding a bus."
Unfortunately, some frustrated workers want off. According to a survey by Buck Consultants, 77 percent of employees eligible to participate in a 401(k) in 1999 did so. Today, that number is down to 73 percent, the lowest rate since 1991. "The most powerful force in 401(k) behavior is inertia," says Rich Koski, a principal with Buck Consultants. "If active participants are leaving the system, it's going to be hard to get them back."
Even for die-hard savers, it has been a rough three years. Last August, John McNally did something out of character: The 42-year-old Quakertown, Pa., resident, who contributes 15 percent of his salary to his plan and considers himself a buy-and-hold investor, shifted all his 401(k) into bonds and cash. "I was getting statements showing me that this was my beginning balance, that 15 percent of my paycheck goes in, but the ending balance still ended up being lower," says McNally, who eased his money back into equities a few months later. "Psychologically, I just needed to see my balance go up, if only for two months."
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