Fidelity: 401(k)s are Beginning to Recover

But a quarter of those approaching retirement have extreme investment allocations

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The average Fidelity 401(k) account balance rose 13.5 percent in the second quarter to $53,900. The increase, driven primarily by stock market gains but also due to new worker and employer contributions, follows a 27 percent drop in the average account balance from $69,200 in 2007 to $50,200 in 2008.

For the first time in 3 quarters, more 401(k) participants increased the amount they are tucking away for retirement than decreased it, according to Fidelity’s data representing 17,500 corporate retirement plans with 11.2 million participants. Only 1.3 percent of workers stopped contributing to their retirement account in the second quarter, down from 2.2 percent over the past 2 quarters.

Workers generally put their new contributions into more conservative investments than in previous years. About 68 percent of new 401(k) savings was allocated to equities, down from 80 percent in 2000.The most popular investment selection for new savings was domestic and international equities (42 percent). Retirement savers also allocated their cash into blended or lifecycle funds (24 percent), money market, stable value, and fixed-income options (24 percent), and company stock (8 percent).

Savings behavior varied considerably by age. Employees in their 20s were the least likely to be contributing to a retirement plan, with less than half (44 percent) of eligible workers participating. About 65 percent of workers in their 30s and 40s utilized their 401(k), saving an average of 7.7 percent of their salary. But some middle aged workers also raided their retirement accounts early. Nearly a quarter of retirement savers in their 30s and 40s (23 percent) had at least one 401(k) loan and almost a third of the loan recipients were repeat loan users.

Those approaching retirement were the most likely to make ample use of their 401(k). About 70 percent of eligible employees age 50 and older participate in a retirement plan at work, saving an average of 10 percent of pay. The biggest challenge for those near retirement is selecting an asset allocation that balances risk with potential rewards. Over of quarter of those approaching retirement age (26 percent) engaged in extreme investment behavior including holding 100 percent of their nest egg in equities (14 percent) or having no exposure to the stock market (11 percent). Holding no equities has historically resulted in lower returns, while an extremely aggressive portfolio near retirement age leaves employees especially vulnerable to stock market plunges.

For more information, see:

  • 5 Ways Employers Plan to Change Their 401(k) Plan
  • Employees Can’t Quantify 401(k) Fees Paid
  • Did Your 401(k) Lose More Money Than Your Peer's?