CELEBRATE STABILITY ON 401(k) DAY

401(k) System Shows Stability Amidst Chaos

CHICAGO (August 29, 2002)  - September 3 is 401(k) Day, the national day dedicated to celebrating the role of 401(k) plans in helping American workers take control of their long-term financial well-being through employer-sponsored plans. But after over a year of stock market chaos punctuated by terrorism, corporate scandal, and recession, how does one celebrate 401(k)? The answer is: The same way one always celebrates 401(k) – by taking a long-term perspective, ignoring day-to-day distractions, and recognizing that the value of participating in a 401(k) plan is not diminished when the stock market goes down.

Despite the tumultuous stock market of the past several months, new data demonstrates remarkable stability in the 401(k) system. This data indicates that during the past year of uncertainty, most individuals did not make rash changes to their 401(k) plans. Despite market turbulence, the American workforce continues to plan for a secure future by taking advantage of employer-provided 401(k) plans – and in this market, they are buying shares of stock cheaper than they could a year ago.

401(k) Deferral Rates Remain Stable
New data from the Profit Sharing/401(k) Council of America (PSCA) shows that average participant deferrals were unchanged in 2001, remaining at 5.3 percent of pay. According to David Wray, PSCA president, this reflects 401(k) participants taking a long-term perspective and not being swayed by market volatility. "Most participants understand 401(k) plans are a long-term investment," said Wray. "It is good news indeed that individuals are continuing to defer money to their 401(k)s during a down market. They are purchasing shares at discounted prices compared to a few years ago."

Low Trading Throughout Turbulence
Recent data from The Vanguard Group on participant trading practices shows that the majority of participants are staying the course, showing little reaction to ups and downs in the market. In 2001, 86 percent of participants in plans administered by The Vanguard Group made no trades in their 401(k) plan at all, similar to 84 percent of participants in 2000 and 83 percent of participants in 1999. As of July 2002, 90 percent of participants had made no trades at all, nearly identical to the same time period last year, during which 91 percent of participants made no trades. "It is very encouraging that the overwhelming majority of 401(k) participants have maintained a long-term perspective by remaining with their current asset allocation during the volatility over the past few years," said F. William McNabb, Managing Director, Institutional Investor Group, at The Vanguard Group.

Attitudes Still Very Positive
Perhaps the best news for the 401(k) system right now is that workers continue to recognize the importance of their plans. According to the latest installment of The Principal Financial Well Being Index^SM, defined contribution plans continue to rank second only to health insurance in terms of importance to workers. And despite this year’s bear market, the Index measured an uptick (from 63 percent last quarter to 72 percent this quarter) in workers who described defined contribution plans as "very important". "The 401(k) plan has undoubtedly been one of the most successful tools ever in helping American workers save for retirement," said Daniel Houston, senior vice president, the Principal Financial Group. "The Principal Financial Well-Being Index confirms that despite current volatile times, Americans’ confidence in the 401(k) plan as a long-term savings vehicle remains strong."

Assets Still Going into Equities
Additional data from The Vanguard Group shows that the majority of new 401(k) contributions continues to flow into equities. Consistent with prior years, Vanguard data January 2002 through July 2002 shows that more than 70 percent of new 401(k) contributions has flowed into equities. "Equity investments through the 401(k) remains on target with respect to the long-term asset allocations appropriate for most 401(k) plan participants," said F. William McNabb of The Vanguard Group. "In the current market environment, participants are actually obtaining the benefit of dollar cost averaging by acquiring shares of stock at lower prices than in the previous years."

401(k) Day – A Celebration of Success
For tens of millions of workers, participation in 401(k) plans is building a firm financial foundation for retirement security. The data above indicates that most participants understand that short-term stock market volatility is irrelevant to the big picture. 401(k) participants are taking a healthy long-term attitude towards their plans, continuing their deferrals despite market turbulence, and continuing to invest in equities. Participants understand that income tax deferral and company matches make 401(k) a good investment no matter what the market conditions are. Since 401(k) plans are such a critical component of sound retirement preparation, this is indeed cause for celebration.

The Profit Sharing/401(k) Council of America (PSCA), a national non-profit association of 1,200 companies and their 6 million employees, advocates increased retirement security through profit sharing, 401(k) and related defined contribution programs to federal policymakers and makes practical assistance with profit sharing and 401(k) plan design, administration, investment, compliance and communication available to its members. PSCA, established in 1947, is based on the principle that “defined contribution partnership in the workplace fits today’s reality.” PSCA's services are tailored to meet the needs of both large and small companies with members ranging in size from Fortune 100 firms to small, entrepreneurial businesses.