Investors raiding their 401k accounts

Here's more sobering news about how American workers are responding to the recent stock market turmoil, housing market decline, credit crunch, vanishing wealth, and general feeling of defeatism.

From the Wall Street Journal comes this report:

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% 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% increase in hardship withdrawals in the first eight months of this year, compared with the same time last year.

Plan participants are said to be putting the withdrawn money into FDIC insured CDs while some of the money that stays behind is being moved from equities into fixed income funds.

In a move that runs counter to both conventional wisdom and everything that is known to be good and true about Money Magazine, the total 401k allocation to equities has dropped from 68 percent to 62 percent over the last year.

Reports have been circulating that many plan participants have reacted violently when informed that conventional wisdom is often wrong.