Even in tough economic times, workers add to their retirement plans
Workers spooked by inflation, 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 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 now 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, the 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.
But Barry Glassman, a financial planner at Cassaday & Co. in McLean, Va., said workers rarely miss the dollars taken from their paycheck though they might later agonize when they see their contributions eaten up. Indeed, it can be hard for investors to see a reversal. From 2003 to 2007, for example, many workers likely saw increases in their portfolios.
"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."
While the Pension Protection Act provides employees greater access to professional advice about where to put their money, persuading people to jump into choppy markets can be difficult.
Workers starting out might not notice the initial hits their investments take because the amount they add from each paycheck can make up for losses, Glassman said. But workers can panic in later years when losses look more pronounced.
Even those who begin investing in difficult times can trip themselves up by shifting too much money into defensive areas like government bonds, Glassman said. It's important to maintain a diversified portfolio because beaten-down areas might not recover at the same pace.
Tim Paradis writes for the Associated Press. 