Don’t Count on Investment Returns to Finance Retirement

Savings and employer matches account for most 401(k) growth


Chasing returns within a 401(k) generally hasn’t paid off for investors over the past decade, especially those close to retirement. Most Fidelity 401(k) participants who chose a riskier asset allocation than Fidelity’s target-date fund earned lower returns between 1999 and 2009. Among the 65 percent of decade-long 401(k) participants who took on more equity exposure, 69 percent earned a smaller return than the target-date fund aimed for retirement at age 65.

[See Should Saving for Retirement be Required?]

What did boost 401(k) account balances was long-term participation in a 401(k) plan and obtaining an employer match. Among employees who saved continuously between 1999 and 2009, the typical account balance grew from $65,800 in 1999 to $163,900 at the end of 2009. The continuous participants, who had a median age of 51, more than doubled their money over a decade largely by contributing 10.4 percent of their salary to a 401(k) each year. New deposits accounted for about three quarters of account growth.

[See 6 Ways Employers Will Change 401(k)s in 2010.]

401(k) account balances are continuing to rebound. The average Fidelity 401(k) account held $64,200 at the end of 2009, up 5.7 percent from the third quarter and 28 percent for the year. Participants contributed an average of 8.2 percent of pay to their retirement account last year, according to the Fidelity analysis of 11 million participants in over 17,000 401(k) plans.

[See How Automatic Enrollment Affects Your 401(k) Match.]

The typical investor’s appetite for risk has declined over the past decade from over 80 percent invested in equities in 2000 to less than 70 percent today. The proportion of retirement savers putting their entire nest egg in the stock market has also decreased from 47 percent in 2000 to 19 percent at the end of 2009. Instead, investors allocated more of their retirement stash to target-date funds and balanced funds. Part of this more conservative trend can be explained by employers automatically enrolling their workers in target-date funds if they fail to make investment choices or opt out. Some 65 percent of Fidelity 401(k) plans use target-date funds as their default investment option.