‘Panicky’ investors raiding their 401(k)s

By Jennifer Levitz

updated 9:17 a.m. ET Sept. 25, 2008

Economic and stock-market tremors are rattling the nest egg.

With stocks falling, credit tightening and unemployment rising, small investors have been raiding their 401(k) accounts or slashing contributions to the popular retirement plans, according to the latest tallies of plan administrators. Others, eager to shield their portfolios from further damage, are reducing their exposure to stock mutual funds to near record lows.

The behavior — described by some market watchers as panicky in the past week — has led to worries that the retirement prospects are dimming further for Americans, most of whom no longer have private-sector pensions to rely on.

Recent 401(k) winnowing is coming in the form of "hardship withdrawals" — removing cash from the fund, with a 10 percent tax penalty, for exigencies such as job loss, the prospect of losing your home to foreclosure or a big medical expense.

T. Rowe Price Group Inc. in Baltimore saw a 14 percent increase in hardship withdrawals in the first eight months of this year, compared with the same time last year. Boston-based Fidelity Investments says the number of workers with hardship withdrawals rose 7 percent from April through June, compared with the same time period a year earlier. Principal Financial Group Inc., in Des Moines, Iowa, says that requests for hardship withdrawals are up 5 percent this year through Sept. 18, over last year, and that the withdrawal amounts are larger.

All three said they could furnish no withdrawal information about last week, when traffic on their Web sites was up sharply. On Friday, visits to the Fidelity.com Web site were 25 percent higher than the previous high. TIAA-CREF, the big college-retirement fund manager, said calls rose 30 percent over normal last week.

Massachusetts' Secretary of State William Galvin says his office received numerous calls from people who were in a "panic state" and liquidated portions of their 401(k) accounts last week when the market tumbled, not realizing they triggered tax penalties. Mr. Galvin, the state's chief securities regulator, is urging Congress to eliminate the 10 percent penalty on such withdrawals — which comes on top of regular tax rates — for investors who may have acted without knowing the consequences.

Mr. Galvin said relief for individual investors is especially appropriate given the $700 billion bailout fund being proposed to aid financial institutions in the crisis. "If we are providing amnesty to financial services," then "we ought to provide a few breaks to these people."

With the decline of the traditional pension, 401(k)s are the main source of retirement coverage for roughly 60 percent of U.S. workers in the private sector. Currently, about $3 trillion in assets are held in 401(k) plans, according to the Investment Company Institute, the industry group for mutual-fund companies. Many investors are now watching that nest egg shrink, with the Standard & Poor's 500-stock index down 23 percent this year. Headed into the financial crisis, typical retirement accounts were heavily weighted toward stock mutual funds.

At the same time, 401(k) participants fear they won't have the time, or the financial wherewithal, to replenish their accounts. In a change of priorities from a year ago, full-time workers now worry more about "just getting by" — meeting day-to-day expenses — than saving for retirement, according to a survey of nearly 1,000 U.S. employees scheduled for release this month by Transamerica Center for Retirement Studies, a nonprofit corporation funded by Aegon NV's Transamerica Life Insurance Co.

But many investors are up against their credit-card limits or, because of the credit crunch, are no longer able to tap their home equity for that needed cash. Instead, they are increasingly turning to their retirement accounts to stay current.

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