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Retirement accounts grow despite economic pessimism

October 06, 2011

| Money Rates Columnist

U.S. consumers are still pessimistic about the economy, but they are taking steps to bolster their retirement savings accounts.

According to a recent Mercer Workplace Survey, the percentage of 401(k) retirement savings accounts participants who increased their contributions increased from 31 percent to to 41 percent in the past year. Participants are also managing their contributions more actively, with 40 percent reallocating existing portfolios--up from 30 percent a year ago. An increasing number of 401(k) participants are also planning to contribute the tax-deferred maximum amount.

This activity comes at a time when consumers are demonstrating an increasingly dim view of their economic prospects. According to the U.S. Labor Department, incomes fell 0.6 percent in 2010 and 1.1 percent in 2009, and spending fell 2 percent--only the second drop since the Labor Department began tracking this behavior.

Consumers have plenty of reason for their bleak view. Although current mortgage rates and refinance rates remain very low, the housing market continues to struggle. The stock market has been volatile in recent weeks, and there is ongoing concern about the downgrade this summer of U.S. long-term debt.

Add to that the gridlock in Congress, and consumers have little reason to be hopeful. Unemployment remains stuck at 9.1 percent, and the consumer confidence index remains low.

While consumers are closely watching their checking account balances, the stock market continues to stagger. The Dow Jones Industrial average ended the third quarter down more than 12 percent, while Standard & Poor's, the benchmark for most 401(k) retirement savings accounts, ended the quarter down 14.3 percent, the highest decline since the fourth quarter of 2008 when the market plummeted 22.6 percent.

With stocks dropping, investors have sought a safe harbor in cash and federal debt. Deposits in some banks have hit record highs recently as large companies and individuals shoveled their money into checking accounts, money market accounts and online savings accounts, and the yield on 10-year Treasury notes fell to 1.90 percent, down from 3.16 percent in June.

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