Fidelity says Average 401(k) Retirement Balance rose 13.5% in Second Quarter

(August 17th, 2009)

Fidelity Investments, the country’s largest provider of retirement savings plans for employees reported last week that the average 401(k) retirement plan rose 13.5% in the 2nd quarter of 2009. In this report, Fidelity also released a report showing analysis of participant behaviour at different life stages and ages that is discouraging or preventing millions of Americans to save towards their retirement. In addition to more than 300 Fidelity mutual funds, the company offers discount brokerage services, retirement services, estate planning, wealth management, securities execution and clearance, life insurance, etc.

In its retirement division, the company holds 17,500 corporate defined contribution plans and 11.2 million participants’ 401(k) plans. A study done in the 2nd quarter of 2009 showed that the portion of participants increasing their deferral rate in the second quarter was larger than the portion decreasing the rate. This reverses the trend that occurred in the last 3 quarters, where participants were steadily decreasing their salary deferral rates, and making lesser contributions towards their 401(k) plans. Fidelity reports that the average account balance rose 13.5% in the 2nd quarter from the end of the first quarter 2009 to $53,900, thanks to the rising stock markets and added salary deferrals and contributions from plan participants.

Scott B. David, V.P of Workplace Investing, Fidelity Investments quotes, “More workers are increasing their savings levels in their 401(k) plans as Americans across the country recognize the need to save more. The downturn has really reinforced the importance of saving consistently and having a diversified portfolio.”

Fidelity also took the initiative to study the 401(k) data by age groups and to identify key behaviours that are preventing from people in various age groups to save for their retirement, and to start making or increasing their salary deferrals. Here are some factors:

i) Lack of Participation Among Young People in their 20s

Although the rate of young people making salary deferrals today has increased thanks to automatic enrolment in 401(k) plans, there are still millions of young people out there that do not have 401(k) plans. In fact, less than half (44%) of eligible workers in their 20s contribute to their workplace plans today. Scott David quotes, “A savings gap in the early years has a much more damaging impact on long term savings levels than a gap in the later years so it is critical that workers get started as early as they can.”

ii) Increased Loan Borrowing among People in 30s – 40s

When workers reach their 30s and 40s, they tend to save more towards retirement, and that is proven by the fact that the participation rates in this age group is 66%, as opposed to 44% in people in their 20s (see above), and a higher average elective deferral rate of 7.7 percent of salary. However, the age 30s to 40s is when many people take out a mortgage on their house, car loans and other types of loans as their financial priorities and needs increase. As a result, almost one in four workers (23%) in this age group have one or more outstanding loans, and more than one in 10.6% initiated a loan over the past 12 months.

iii) Asset Allocation Troubles Investors in their 50s

People in their 50s are more aware of their need to step up their retirement savings, thus the average participation in this age group is 70%. However, the people in this age group are not aware of proper asset allocation to minimize risk, and maximize returns. More than 26% of investors in this age group either have no equities in their portfolios, or are 100% invested in equities, and hold no other types of investments such as real estate investment trusts, mutual funds, fixed income bonds, etc. The breakdown is such that 11.4% of investors in this age group own no stocks, and 14.2% are 100% invested in stocks.

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