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May 11, 2005
401(k) Participation Rate Edges Up

The rate of participation in 401(k) plans increased 2.1 percent to 70.3 percent from 2002 to 2004, and average 401(k) balances reached $69,000, according to a study by Hewitt Associates.

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Hewitt's study examined the saving and investment behavior of more than 2.5 million employees eligible for 401(k) plans.

It found that nearly 30 percent of employees still did not participate in their 401(k) plans, with only 46 percent of workers under the age of 30 participating. Of those who did participate, nearly one in four (23 percent) had a total plan balance of less than $5,000.

"Despite all the attention around retirement, it's discouraging to see that many people -- especially younger workers -- still do not feel a sense of urgency to take control of their financial security by investing proactively in their 401(k) plans," says Lori Lucas, director of participant research at Hewitt Associates. "While employer efforts to encourage better saving and investing habits seem to have some positive effects, many employees are not heeding the wake-up call to prompt them into action."

Almost 80 percent of employees who were contributing to their 401(k) plan contributed enough to receive the company match in 2004; however, one in three (31 percent) contributed only enough to obtain the full company match. As many as one in five employees (22 percent) failed to contribute enough to obtain the full 401(k) company match.

Hewitt's research shows a slight improvement in employees' 401(k) diversification efforts. The number of funds held by participants in 2004 increased to 4.2 funds, up from 3.6 funds in 2002.

However, employees invested, on average, approximately 27 percent of their total 401(k) balance in company stock in 2004, which is still the single largest holding for employees participating in their company's 401(k) plan. About one in four (27 percent) employees held half or more of their total 401(k) balances in their employer's stock.

"With such little evidence that many employees understand or appreciate the risk of owning large amounts of company stock, diversification remains an issue in many plans," Lucas says.

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