401(k) increases signal growing consumer confidence

If you have experienced a noteworthy increase in your personal 401(k) account over the last three years, you are not alone.
According to a report by Fidelity Investments, balances in 401(k) retirement accounts have seen a marked increase in that time and were about 62 percent higher on March 31, 2012, than they were in the first quarter of 2009.
The improvement was a reflection of strong stock market performance and growing consumer confidence in the market. It can also be attributed to an increase in both participant and employer contributions, as some were reduced during the worst of the market downturn, said Fidelity.
However, despite the encouraging results the market still shows signs of volatility. For example, on May 1, the Dow Jones Industrial Average finished at 13,264, its best since Dec. 31, 2007. In just over a month it had dropped to 12,101 on June 5, due in part to austerity measures and elections in Europe, as well as anemic job-creation statistics.
Fidelity reported on May 1 that its average 401(k) balance rose to $74,600 at the end of the first quarter, an increase of 8 percent from the end of the fourth quarter 2011. That is also a 62 percent increase since the end of the first quarter 2009, the unofficial low point of the 2008-2009 market downturn, when the average balance was $46,200.
“The first quarter of this year was a very good year,” said Daniel R. Legault, a senior financial adviser at StrategicPoint in Providence. “So it’s interesting that it is about only one month later [based on the Fidelity report] and the situation has changed.”
Legault could not speak in detail about his own clients, but said “the general sentiment is that people are starting to increase their 401(k) contributions.” He understands the “investor psychology” commonly used by many; to increase contributions when the market is high and reduce it when it becomes too low. “That’s one thing that StrategicPoint tries to do. We try to manage that risk for our clients. When times are overly good we try not to get overly optimistic and when times start to change, like particularly in the last month, we try not to get too pessimistic,” he said.
Rather than immediately react to the markets, Legault takes a long-term approach. “It’s all about your risk tolerance and trying to keep investors informed.”
According to Beth McHugh, vice president of market insights for Fidelity, the report is an accurate reflection of trends. The analysis is based on the company’s 11.8 million accounts representing about 17,000 employers.
“Our breakdown showed that about one-third [of the increases in overall account balances] was due to an increase in employee contributions while the remainder was attributable to the market,” McHugh said.
“During the first quarter, maybe about one in 10 accounts made a deferral percentage increase,” she said. But she also explained it was partially by design, part of an automatic annual increase program that many employers have adopted and begin during the quarter. “We figure that the automatic program was responsible for about 35 percent of the total increases,” she said. “During the last two years we have seen the market rebound nicely and a lot of people were able to take advantage of that,” she said.
A review of their data on participants that have had an account for 10 years shows that their average 401(k) balance was $194,300, versus $103,700 in the first quarter of 2009. About 57 percent of that increase was due to increased participation and less withdrawals. Forty-three percent was a result of market increases. “You can really see the impact and the power of consistent commitment to savings in the long term. We try to reinforce to employees the need for a plan and a need to stay committed to a plan and to save at a healthy rate, somewhere between 10-15 percent,” she said. “If there is a company match we recommend saving up to the match at a minimum.” McHugh believes the worst economic times for 401(k) plans may be over. In 2009, some employers were left with no choice but to reduce or cancel their contribution. Now, she said, employers are beginning to reinstate their contributions, or are returning them to pre-recession levels.
From September 2008 to March 2009, Fidelity found that more customers were decreasing, rather than increasing, their contribution. Since then, a slow increase in contribution amounts has been observed.
According to a 2011 survey from the Employee Benefit Research Institute, 60 percent of the respondents reported they have less than $25,000 in total savings and investments, excluding their home and defined-benefit plans. Thirty percent have less than $1,000.
Another indicator of the economic meltdown was that 34 percent of workers had to withdraw money from 401(k) plans to pay for basic expenses in the past 12 months. Workers’ confidence in their ability to retire remains at an all-time low, with only 14 percent believing they would retire with enough money. &#8226

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