Defined contribution plan participants are cutting their contributions as day-to-day cash needs take center stage for more people.
Plan executives and industry experts say employee deferral rates are showing signs of decline.
According to data from Hewitt Associates, Lincolnshire, Ill., overall DC deferral savings rates dropped to 7.4% of salary as of Dec. 31, from 7.8% a year earlier.
Also, 5% of employees terminated their 401(k) plan contributions entirely last year, compared to 3% in 2007.
The average pre-tax contributions based on age, salary and tenure were all down in 2008 as well.
“Employee nervousness is considerable out there, and employers are overwhelmed in this environment,” said Pamela Hess, defined contribution practice leader at Hewitt. “By the end of 2009, we can see employees making further reductions in their contribution rates as everyday pressure to make ends meet increases and nervousness rises. This will slowly increase pressure to lower their contribution rates.”
David Wray, president of the Profit Sharing/401(k) Council of America, Chicago, agreed, but added he believes the contribution decreases are coming from participants at the higher end of deferral rates and in excess of the level where a employer's matching contribution stops.
“Perhaps people who save 9% or 10%, beyond the match limits, are driving this overall movement to lower contribution rates,” Mr. Wray said.
When asked about how to halt sliding deferral rates or stop workers from opting out of retirement plans, Ms. Hess said: “The reality is some people might not be able to contribute to their 401(k) retirement plan (this year).”
She added: “It might take a year to get employees back in the plan via automatic re-enrollment processes.”
Ms. Hess warned that if the economy continues to decline, deferral rates could decline further while opt-out rates would increase.
“At what point does this deluge of bad news hit a larger and more significant portion of the working population? That's the $25,000 question,” she said.
According to data from The Vanguard Center for Retirement Research, a unit of Vanguard Group Inc., Malvern, Pa., 3.1% of active defined contribution participants in plans serviced by the money manager halted their contributions in 2008. That compares to 2.4% in 2007.
Two-thirds of all participants who stopped contributing in 2008 did so in November and December, when 1.1% and 0.95%, respectively, halted contributions.