WORRIES ABOUT A DROP IN 401(k) CONTRIBUTIONS PERMEATE MARKET

Financial advisers and industry veterans are worried that investors might reduce or halt their contributions to 401(k) plans if the economy worsens this year.

The No. 1 challenge they face is to encourage clients to continue their contributions despite the recession.

“The advisers can educate participants that everything’s on sale,” said Bill Harmon, vice president of corporate markets for Great-West Retirement Services of Greenwood Village, Colo.

“This is a great time for all advisers to show some historical [data] such as what happened in 2002, what happened in 1987 and how long it took to recover. It seemed like we had the same conversations,” Mr. Harmon said.”

“I think we’ll see participants’ reducing contributions,” said Joseph Leonard, an adviser with Coastal Investment Advisors LLC in Southport, N.C., which has assets under management of $100 million. “But in a market of volatility, the conservative approach is to pull the reins back in and keep everything within that person’s control.”

Moreover, advisers and industry leaders worry that an anemic economy means that employers will stop matching contributions from employees, eliminating the incentive for participants to continue saving for retirement.

REDUCED MATCHES

Last year, companies such as Eastman Kodak Co. of Rochester, N.Y., and General Motors Corp. of Detroit ended their matching contributions.”Every company is looking to the bottom line and trying to cut [costs],” Mr. Leonard said. “If an employer is matching, it’s a cost to the bottom line.”

The concern is that if the economy worsens, financial pressures will put more of a strain on individuals, leaving fewer in a position to save for retirement.

“We’ve seen an uptick in people decreasing their retirement savings,” said Dean Kohmann, Richfield, Ohio-based vice president of 401(k) plan services at The Charles Schwab Corp. of San Francisco.

Investors will commit enough of their salaries to qualify for the company match, but they are unlikely to do much more, so that they can pay down debt, he said.

Schwab has more than $200 billion in retirement assets and 1.3 million participants.

To be sure, the decrease in the savings rate is reason for concern.

“A lot of consumers are in danger of stopping their contributions to their plans at precisely the wrong time, especially those who contribute a flat percentage,” said Gregory Salsbury, a Denver-based executive vice president of Jackson National Life Insurance Co. in Lansing, Mich.

Although companies will be under pressure to cut costs, many realize how important retirement benefits are, and they are trying even harder to get employees to save during this recession.

“I think there’s a way we can continue to grow the system and get people to use the system,” said Kevin Crain, Hopewell, N.J.-based managing director of institutional client services for Merrill Lynch Retirement Group in Pennington N.J., which had $90 billion in assets and 2.7 million participants in its defined contribution business as of Sept. 30.

Yet, some companies are seeing that many participants have continued to invest in their 401(k) plans.

Fully 90% of participants continued to put money into their retirement plans, according to the Principal Financial Well-Being Index, from The Principal Financial Group Inc. in Des Moines, Iowa. It showed that participants hadn’t made any changes to their 401(k) contributions.

The online survey, which was released last month, was conducted in the United States between Oct. 22 and 29, and reflected responses from 1,179 employees and 625 retirees.

Just 3% of those surveyed had stopped contributing to the plan, said Dan Houston, president of retirement and investor services for The Principal. “We’re not seeing reductions in 401(k) contributions,” he said.

Mr. Houston is hopeful that consumers will continue to cut their spending this year, while continuing to save for retirement.

Consumers are interested in financial advice in the wake of losses in their accounts.

They will be willing to pay for retirement-planning advice this year, said Tim Chapman, chairman and chief executive of PMFM Inc. of Watkinsville, Ga., which manages about $1.2 billion in assets. The firm created the 401k Toolbox service, a managed-account product developed for participants.

“A huge portion of the bear market has persisted since mid-September,” Mr. Chapman said. “There will be shell shock when people see the annual statement.”

E-mail Lisa Shidler at [email protected].