Retirement Plan Investors Still Saving: FidelityLauren Young
Fidelity Investments came out with its 2008 retirement trends data today, and the news isn’t as bad as it could have been. Sure, average retirement account balances fell a whopping 27% to $50,200 last year. But investors haven’t stopped putting money into their 401(k) plans-yet.
Based on analysis of Fidelity’s 17,095 corporate 401(k) plans representing over 11 million participants, the typical investor contributed an average of $5,600 (pre-tax earnings) to their 401(k) accounts last year, which is slightly higher than 2007 levels.
I spoke with Scott B. David (pictured left), Fidelity’s president of workplace investing, about retirement trends.
The market is down so much. Why are people still contributing to their retirement accounts? A lot of people’s attention has been focused on companies suspending matches or anecdotal evidence that people are fleeing from retirement savings accounts, but that’s not the case, based on our findings. Participants are continuing to contribute to 401(k) plans through the workplace. We saw the same seasonality in 2008 as we did in previous years. People tend to max out contributions earlier in the year. This happened again in 2008. There is no question things are bad. But I also believe American workers are continuing to save in 401(k)s because they recognize that having retirement savings is a must-have, not a nice-to-have benefit. It goes back to the inherent advantages of a retirement account: You get the tax-deferred savings, and it’s convenient to invest because you do it through payroll deduction. In many cases, retirement savings provides people with their first investing experience. And plenty of companies still offer a match, so that’s free money.
What surprised you about the data? Employees are much better diversified than they used to be, and that’s because they are defaulting into age-appropriate lifestyle funds. Also the number of employees with a 100% account balance in equities was 37% in 2000. It fell to 16% in 2008. It’s a great indication investors understand the importance of diversification. Also, the role of company stock in an investor’s portfolio is changing. In 2000, they had 20% of their retirement account allocated to company stock. Today that’s only 10%.
What else is noteworthy about participant behavior? Most people aren’t borrowing from their retirement accounts. The average loan amount was $8,400 in 2008. And if they took a hardship withdrawal, it was $6,000. People generally take out the hardship loan first. If their financial condition continues to be challenging, then they will take a hardship withdrawal. Within 12 months of taking a loan, 32% of those people initiated a hardship withdrawal. The good news is that loans are down-the population that is taking money out has been reduced year over year.
Are investors making a lot of changes within their retirement accounts? Some 60% of plans administered by Fidelity in 2008 utilized a lifecycle fund as a default investment option, that’s up from 38% in 2007. What happens in a time of short-term volatility is that investors in these funds are not switching. Only 1% lifecycle fund investors made a change compared to the overall average to 6.1%.
Do you expect more companies to suspend their match? Most plans allow the employer to change their match or suspend it based on business conditions. We are seeing a lot of companies taking a wait-and-see approach. Less than less than 1% of our clients have actually informed us they are suspending or reducing their match, which is very positive.
What’s your outlook for the retirement market in 2009? So far we are not seeing any evidence of participants cutting back on retirement investing. The most important thing workers need to understand is that regardless of the financial condition of their employer, these funds are held in trust. It’s your money. That gets lost in the conversation-people confuse 401(k)s and similar plans with pensions. If you do lose your job, one of our most critical messages to workers is: Don’t cash out. You’ll lose the rebound that will inevitably come, and you’ll be hit with a huge tax bill.