Plan participants play it cool amid crisis

The ongoing market crisis hasn't changed the behavior of defined contribution plan participants, according to DC experts.

Shlomo Benartzi, professor and co-chair of the behavioral decision-making group at the Anderson School, University of California at Los Angeles, said the data he examined — which includes fund transfer activity, online balance inquiries and vendor customer call center volume — all point to plan participants not making rash decisions in the current financial meltdown.

Mr. Benartzi cited data from T. Rowe Price Retirement Plan Services to back up his claim. He said the 186,750 calls made to the T. Rowe Price center is insignificant compared to the 1,690,340 plan participants served by the company. Mr. Benartzi noted an increase in online balance inquiries to 350,000 in September and 430,000 in October 2008 vs. an average of 300,000 inquiries per month in 2007.

“It is still the case that most participants neither called the hotline nor visited the website. Hence, it seems as though plan participants are not panicking,” said Mr. Benartzi. “In terms of the data, there was a little spike in October ... but when we get to January 2009, both call center (160,000 calls) and online activity (350,000) were close to their historical averages again.“

“People are not as nervous as we think — and are not losing ... sleep over the events that have happened,” Mr. Benartzi said.

But he said problems could still be lurking. “Plan sponsors shouldn't be overconfident that participants will not react at all. It is very possible plan participants will start to sell their holdings and stop saving real fast. This might not happen soon, but it could well happen.”

According to Hewitt Associates, Lincolnshire, Ill., the average 401(k) account balance decreased 18% as a result of the recent market meltdown. Therefore, a typical 55-year-old employee with a current average 401(k) savings rate of 10% of pay will need to save an additional 12% each year until age 65, or work for two more years, to replace what was lost in 2008. The average 40-year-old with a current average 401(k) savings rate of 7% must work one more year or save an additional 1% of pay per year until age 65.

Said Lori Lucas, executive vice president and defined contribution practice leader at Callan Associates Inc., San Francisco: “People ... are concerned, but simply do not know what to do about it. ... There is a lot of frozen activity.”

Ms. Lucas said the current inertia of DC plan participants actually seems to be benefiting them.

Participants appear to be experiencing a fear of regret, she said: If an employee doesn't do anything, he will have no regrets later about possibly having made the wrong choice. This is borne out by Callan data showing that transfer activity from equities into other asset classes in the fourth quarter was below average as measured by The Callan DC Index since it was created in January 2006.

“The inertia we are experiencing is a good thing,” said Dena Zezulka, benefits manager for Kwik Trip Inc.'s $58 million 401(k) plan, La Crosse, Wis. By refraining from making changes, employees are doing the right thing, she added.

“In our business model, we are doing a bit of education and telling workers to stay the course and be patient, hang in there. Let's not miss the ride back up,” she said, referring to an equity market rebound.

Brian Settle, chief human resources officer at NCH Healthcare System, Naples, Fla., said employees in his company's $100 million 401(k) plan also seem to be waiting for a reversal of the stock market's losses.

“We have seen little movement away from stock funds,” Mr. Settle said. “While I would like to think our education is working, I think the truth is that our participants are hoping for a market turnaround, and this (inertia) should work in their favor.”

UCLA's Mr. Benartzi also noted the lack of movement out of equities so far, but added that because 401(k) plans are relatively new, predicting behavior on past experience is difficult.

“We have to keep monitoring this situation to see what develops,” he said.

Mr. Settle said employee behavior now is similar to earlier in the decade, when the technology bubble burst and stock prices tumbled, eroding retirement account values.

“There has been no real change in behavior,” he said.

But Mr. Benartzi said reaction to the tech tumble was limited to only those who were invested in technology stocks only. “This current market crisis has affected a great deal more people and everyone's personal wealth, whether you were an active trader in the market or not,” he said.

Some companies are taking advantage of employee inertia to nudge participants into saving more. Kwik Trip's Ms. Zezulka said her company recently implemented automatic escalation with little employee resistance. With auto escalation, an employee's contribution rate is automatically increased each year by a specified amount.

“There was no pushback from the auto increase program and, given we already have automatic enrollment and few withdrawals and opt-out, our employee contributions have gone up,” Ms. Zezulka said. “I still think it comes down to the fact people don't know what to do, so when they are defaulted into our target-date funds, they stay there. We're very maternalistic, and our workers trust the decisions of the company.”

Ms. Lucas said increased use of automatic account rebalancing as part of a retirement plan also is a way to keep employees saving.

“Some plan participants don't know some of these tools (such as automatic rebalancing) are available to them,” Ms. Lucas said, “Auto rebalancing gives participants more confidence in their savings balances, especially if there's been a cut in their 401(k) company match or a reduction in profit sharing. I think automatic rebalancing will be increasingly popular, once people understand what it is and how it works.”