Thu, January 29, 2009
Fidelity Reports on 401(k) Plan Trends
Boston-based Fidelity Investments provides 401(k) plan management for over 17,000 employers, making it the largest plan administrator in the country. Fidelity’s annual “State of the 401(k)” report, released yesterday, provides a window into the behavior of 401(k) plan participants.
To no one’s surprise, the report disclosed that the average Fidelity 401(k) plan balance dived last year, dropping 27 percent. The average yearend balance was around $50,000, and the average annual pre-tax contribution was $5,600. Although this was slightly higher than in 2007, it seems rather low, but without knowing the full distribution of contributions it’s difficult to draw any conclusions.
The percentage of participants taking out loans and hardship withdrawals did not change significantly from 2007; it will be interesting to see if that changes this year.
One intriguing statistic is that 16% of Fidelity 401(k) participants held 100% of their plan balances in equities (stocks) at the end of the year. Although there’s been a steady decline in the percentage of workers doing this (20% at the end of 2007 and a 37% in 2000), it’s intriguing that this many people are still going with 100% stock portfolios. Presumably these are younger workers who believe that an all-stock allocation is guaranteed to win big “in the long run.” Such an approach makes it impossible to rebalance risky vs. low-risk asset classes on an annual basis and seems inadequately diversified.
The changes that take will place this year in 401(k) plan behavior are likely to be more dramatic. Foreclosures and layoffs have increased, and this could change savings behavior as well as loan and hardship withdrawals.
This is a great time for workers to re-evaluate spending patterns and look for ways to increase savings levels by cutting back on discretionary spending, though it’s not clear that extra saving should go into retirement plans right now. Reduced spending isn’t good for the macro-economy, of course, and works against government efforts to keep the sputtering economy from stalling further. Still, it will be interesting to see whether the present recession causes a long-term change in American consumption and saving behavior. Alas, I think that will only happen if the recession is long and painful.
