Workers’ 401(k) balances move higher

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Despite the recession, more workers ramped up retirement-plan contributions in the second quarter than reduced them, reversing a trend in the previous three quarters of more workers’ cutting contribution rates, according to a Fidelity Investments study of plans it administers for 11.2 million participants.

While the vast majority of workers kept their contributions steady in the second quarter, about 5 percent increased their deferral rate and just 3 percent decreased their rate. Earlier in the economic downturn, the portion of participants cutting their contributions topped 6 percent, according to Fidelity.

The average account balance rose to $53,900 in the second quarter, a 13.5 percent increase from the first quarter, primarily driven by the stock-market rally and employer contributions, said Scott David, president of Workplace Investing with Fidelity Investments.

Workers who maintained a long-term view and “stayed the course during the market turmoil of 2008” are being rewarded now as 401(k) balances improve, he said.

Retirement savers who had a balance with Fidelity in the last five years and maintained that balance saw 35 percent increases. While the capital markets helped, those who didn’t liquidate and move to cash are reaping the rewards, David said.

“You’re buying more shares when prices are down, fewer shares when prices are up,” he said. “Those who didn’t take a loan and withdrawal are very far down the road to recovery.”

Although workers in their 20s, often called Generation Y, increased their participation in workplace plans, the majority still do not take part, according to the study. Only 44 percent of workers in their 20s contribute to their workplace savings plan, though that figure jumps to 95 percent in plans that auto-enroll workers.

“Candidly, I don’t think it’s at the top of their minds,” David said. “Workers in their 20s have, unfortunately, other priorities.” He stressed the importance of starting to save as early as possible in one’s career.

Workers in their 30s and 40s, known as Generation X, show a greater penchant for saving, often because they want to buy a home, save for their children’s education or their own retirement. Fidelity saw improved savings behavior in this age group with participation rates of more than 65 percent and an average contribution rate of 7.7 percent of salary.

Overall, workers’ average elective contribution rate was 8.2 percent of salary as of June 30, down slightly from 8.7 percent a year ago (those figures don’t include company matches, and they don’t include auto-enrolled workers whose contribution rates are set automatically by employers), according to the study.

Meanwhile, savers are taking a more conservative approach to investing. About 68 percent of new 401(k) contribution dollars in the first half went to equities, down from 75 percent in recent years and 80 percent in 2000.

In the second quarter, 42 percent was invested in domestic and international equity options, 24 percent went to blended or life-cycle options, 24 percent to conservative options such as short-term, stable-value and fixed- income investments, and 8 percent of contribution dollars went to company stock.

“They’re taking a more balanced view of how to invest their money because of the recession, because of increased education, because of better tools available to them,” David said.

However, about one-quarter of pre-retirees, or those 50 or older, went to the extremes. Twenty-six percent either have no exposure to equities or hold 100 percent equities in their 401(k) plan. Holding no equities can result in lower returns since their portfolios are less diversified while those who invest only in equities are more vulnerable to a market downturn.

“We can provide all the advice and guidance that we want,” David said. “But if someone’s risk tolerance is different then the guidance that they’re getting they have to do what they have to do to feel comfortable and sleep at night.”

(c) 2009, MarketWatch.com Inc. Source: McClatchy-Tribune Information Services.