401(k) Participation Rate Slips

The Wall Street Journal, 06-Oct-2004, Midwest ed., p. C15

Participation rates in 401(k) plans slipped last year, according to the Profit Sharing/401(k) Council of America's newest annual survey. Only 76% of eligible employees participated in their plans last year, compared to 80% in 2002. David Wray, president of PSCA, said young people may have been scared away by the stock market declines of recent years, regulatory investigations into improper mutual fund trading practices, and fund fees.

It seems with the jittery market we've been experiencing lately, people are backing off their 401(k) accounts again. Many people have told me, "Because of the market, I don't want to risk money in my 401(k); instead I'm going to [insert name of favorite investment advisor] and investing with them."

This is wrong on so many levels.

1. You're foregoing the tax benefits of before-tax 401(k) withdrawals. If you have $2,000 to invest, plopping it into your 401(k) puts $2,000 to work for you. If you take it in after-tax money, you'll have somewhere in the neighborhood of only $1400 working for you.

2. You're leaving free money on the table; if you make just $33,000 and your company matches half of the first 6% you contribute, we're talking about one thousand dollars! By not contributing into your 401(k) at least up to the level that your company matches, you are losing out on tons of money that you've earned.

3. You shouldn't really be looking at the short-term fluctuations of the market in making decisions about retirement money that you won't need for thirty years. But, in any event, if you decided that you didn't want to put the money in stocks and wanted a super-safe cash-equivalent alternative, ALL 401(k) plans have a money market fund or other cash-equivalent account in which you can invest.

4. You can invest in your 401(k) with little or no fees beyond the (often surprisingly high) fees charged by the mutual funds themselves. An investment advisor needs to charge you additional fees to cover their own expenses, often just to end up putting your money in the same types of mutual funds you could put it in yourself.

5. Often, once your particular investment needs are correctly identified, it turns out that the right thing to do is to put your money in stocks. Then your money ends up in mutual funds that are as risky as, or sometimes even riskier than, the funds in your 401(k) anyway.

So, don't let market fluctuations scare you from taking advantage of your 401(k)!