Hewitt Study: Company Efforts Positively Impact U.S. Employees' 401(k) Saving Habits; Despite Progress, More Steps Need to Be Taken to Improve Retirement Saving and Investing Levels.

LINCOLNSHIRE, Ill. -- Efforts by companies to help U.S. employees save for retirement -- including putting the 401(k) plan on autopilot, simplifying plan choices and targeting communication -- have resulted in improvements in employees' retirement saving and investing behaviors, according to a new study by Hewitt Associates, a global human resources services company.

Hewitt's annual study, which examined the saving and investing habits of more than 2.6 million employees eligible for 401(k) plans, revealed the positive effect of automatic enrollment on 401(k) participation rates. Approximately 36 percent of workers with less than one year of tenure participated in a 401(k) plan in 2005, an increase of 6 percentage points from the prior year. Further, among companies that offered automatic enrollment, the overall employee participation rate was 14 percentage points higher than the overall employee participation rate across all companies. Hewitt's study also revealed improvements in overall employee behavior around diversification, company stock and the use of lifestyle funds.

Despite these improvements, nearly half of employees examined in Hewitt's study still failed to participate in their 401(k) plan or failed to contribute enough to obtain the full company match.

"Employer efforts to automate, simplify and better communicate the 401(k) plan are making positive differences in improving certain employee investment behaviors and raising participation rates among hard-to-reach demographics," said Lori Lucas, director of retirement research at Hewitt Associates. "But overall, there's still a lot of work to be done. More companies need to be taking aggressive steps to encourage employees to participate and contribute to the 401(k) plan, especially since it has become -- and will continue to be -- an increasingly critical vehicle for retirement saving."

The Challenge for Companies That Offer 401(k) Plans

Hewitt's survey results highlight very real challenges for companies: In 2005, average 401(k) plan balances grew more than 10 percent to nearly $76,000, but median plan balances were much lower than the average at only $27,100. One-third (32.8 percent) of employees did not participate in their 401(k) plan, and contribution rates remained steady at approximately 8 percent. Of those employees who did participate, approximately one in five (22 percent) didn't contribute enough to obtain the full company match, and just 30 percent contributed only enough to obtain the match. Younger, lower-tenured and lower-salaried workers were most likely to contribute in a nominal way.

Not surprisingly, Hewitt's study found that companies that automatically enrolled employees saw higher participation rates for younger, lower-tenured and lower-salaried workers than those that didn't. Participation rates among employees with less than one year tenure were 30 percentage points higher than those across the entire Hewitt Universe, 21 percentage points higher for employees making under $20,000 in salary, and 22 percentage points higher for employees age 20-29.

"Companies that automatically enroll new hires are seeing a big difference in the behavior of lower-tenure workers in 401(k) plans," said Lucas. "But to make an impact on overall participation and contribution levels, companies need to be thinking about offering automatic enrollment to all employees, or combining it with tools like streamlined enrollment and targeted communication. Companies that already offer automatic enrollment should think about ways to further encourage employees to save for retirement, such as adding contribution escalation features, offering third-party investment advice, or providing tools that help employees better understand the value of their 401(k) plans."

Adoption of Lifestyle and Lifecycle Funds Increases

Hewitt's research also showed a slight improvement in employees' overall 401(k) investing habits, particularly around their use of lifestyle and lifecycle funds.

While the overall number of employees investing in lifestyle and lifecycle funds remained constant, the number of employees using them as turnkey solutions increased. One in five employees holding a lifestyle or lifecycle fund (20 percent) had their entire 401(k) balance in them in 2005, up from 15 percent in 2004. In addition, nearly half of employees (48 percent) with less than one year of tenure investing in a lifestyle or lifecycle fund invested all of their 401(k) monies in a single lifestyle or lifecycle fund in 2005, an increase from 34 percent in 2004.

"Not only are employees more aware of lifestyle and lifecycle funds, an increasing number are beginning to use them in the 'right' way," said Lucas. "This may be attributed to increased employer efforts to help employees make more appropriate investment choices, such as favoring target maturity portfolios, defaulting employees into lifecycle funds when automatically enrolled, and increasing targeted communication and guidance to demonstrate the value and role of these funds."

Use of Company Stock Declines

While the use of lifestyle and lifecycle funds increased, Hewitt's study showed employees have decreased their investments in company stock. Although it continued to remain the single largest holding for employees in 401(k) plans that offer it, the average investment in company stock decreased from 26.5 percent in 2004 to 21.9 percent in 2005. In addition, the number of employees holding half or more of their 401(k) balances in company stock decreased from 27 percent in 2004 to 20 percent.

"To a large extent, this reflects the fact that employers are proactively reducing the role of company stock in the 401(k) plan," added Lucas. "For example, very few employers now restrict diversification out of company stock. This, coupled with the growing availability of third-party investment advice and guidance, and diversification tools such as lifestyle and lifecycle funds, is helping employees make better investment choices in their 401(k) plans."

Other Findings

--The number of workers holding just one or two asset classes in their 401(k) plans decreased from 34 percent in 2003 to 29 percent in 2005, and the number of employees holding more than four investments increased from 40 percent in 2004 to 44 percent in 2005.

--The average employee allocation to international and emerging market equity funds increased to 6 percent in 2005, up from 4 percent in 2004. Employees with less than one year of tenure average 8.5 percent of balances in international funds, or 13.1 percent of equity balances.

--Transfer activity remained steady this year, with approximately one out of six (17 percent) employees making one or more trades in their 401(k) plan in 2005.

--The average employee who invested in a self-directed brokerage account had $90,500 in the brokerage account by the end of 2005, up from $69,300 in 2004. These employees also had a total plan balance of approximately $180,000, up from $164,000 in 2004.

--The average number of trades made by employees in their 401(k) plans has decreased over the past few years, suggesting that transfer restrictions implemented by companies have effectively lowered excessive trading activities.

--The average 401(k) participant is 43 years old, has approximately 11 years of tenure and earns an annual salary of approximately $61,000.

Copies of the complete report, "How Well Are Employees Saving and Investing in 401(k) Plans, 2006 Hewitt Universe Benchmarks," are available for $350 by contacting the Hewitt Information Desk at [phone] or [e-mail].

About Hewitt Associates

With more than 60 years of experience, Hewitt Associates (NYSE:HEW) is the world's foremost provider of human resources outsourcing and consulting services. The company consults with more than 2,400 organizations and administers human resources, health care, payroll and retirement programs on behalf of more than 350 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 22,000 associates. For more information, please visit www.hewitt.com.