401(k) Investors Should Stick with Equities During Market Volatility

An analysis by Fidelity indicates 401(k) investors who stuck with equity allocations after the 2008 financial crisis fared better than those who didn’t.

The recent market volatility drove a record number of people to seek guidance from Fidelity Investments about the impact of market changes on their account balance and steps they should consider.

In early January, Fidelity responded to six million customer contacts in a single day, one of the busiest days on record.

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Trying to move in and out of the market can hurt an investor’s long-term retirement savings, Fidelity says. The firm examined 401(k) investor behavior between 2008 and 2015, and compared people who continued to invest in equities during this period with those who dropped to 0% equity in their 401(k). Assuming the investors started with a balance of $10,000, the analysis showed that investors who went to zero equities saw their 401(k) balances grow by 74% to $17,360, while those who kept a portion of stocks in their 401(k) saw their balance grow almost 150% to $24,800.

“Today’s retirement savers have constant access to detailed market and financial data, which can be unnerving during periods of economic uncertainty and make many investors feel like they have to take action,” says Doug Fisher, senior vice president, Fidelity Investments. “While we understand that it may be tempting to react to recent market volatility, Fidelity’s guidance is to focus on a sound, long-term retirement savings plan. The market will have many peaks and valleys, so having a plan and staying on course puts you in the best position to achieve your financial goals.”

NEXT: 401(k) contributions, managed account use increased year over year

According to Fidelity’s analysis, 401(k) and IRA account balances increased in Q4 2015, but are down year over year. After decreasing in Q3 2015 due to market volatility ($84,400), average 401(k) account balances recovered in Q4 2015 ($87,900), but are still below the averages from Q4 2014 ($91,300).

Both 401(k) and IRA account holders continued to contribute to their retirement savings accounts. The average IRA contribution was $1,500 in Q4 2015, up from $1,260 in Q3 but down from $1,660 in Q4 2014. The average total 401(k) contribution, which includes both employee and employer contributions, was $2,540 in Q4 2015, down slightly from $2,610 in Q3 but up from $2,440 in Q4 2014. During 2015, employers contributed an average of $3,610 to 401(k) accounts through profit sharing or company match.

An increasing percentage of retirement assets are in target-date funds or managed accounts. As of the end of Q4 2015, 25% of total 401(k) assets on Fidelity’s platform were held in target-date funds, and two-thirds (67%) of Fidelity 401(k) account holders had at least some of their savings in a target-date fund. Among Millennials, 63% had all of their retirement assets in a target-date fund at the end of Q4.

In addition, the use of Fidelity’s professionally-managed account portfolios continued to increase in 2015, growing by 19% since 2014.

ACA Driving a Focus on Retirement Plans

Small business owners are looking at retirement plans to replace health benefits as an attraction and retention tool.

An overwhelming majority of small business owners (SBOs) believe that the country is in the midst of a retirement crisis, according to an online study, commissioned by Nationwide and conducted by Harris Poll.

The survey found that 84% of SBOs believe American workers are facing a retirement readiness crisis. However, 60% of SBOs believe that their own employees are on track to retire. Nearly two-thirds (63%) of SBOs say it’s important for a business owner to provide retirement benefits, but, in reality, only one-third (34%) of them offer these benefits to their employees.

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However, of the SBOs who offer retirement benefits, including 401(k) plans, to their employees, 67% say they plan to increase their company contribution to employees. Of the SBOs who do not currently offer retirement benefits, 30% say they plan to offer these benefits in the future.

If that happens, Nationwide notes, then more than half (54%) of SBOs will offer their employees retirement benefits.

A positive economic outlook is a driving force behind this. Half of SBOs who plan to start offering retirement benefits say they will do so because they expect sales or revenue to increase in the next 12 to 24 months (50%), and 32% believe the U.S. economy will improve in the same time frame.

Small business owners who currently offer 401(k) plans and say they will increase contributions have an even more positive outlook: 56% expect company sales or revenue to increase in the next 12 to 24 months, and 53% believe the U.S. economy will improve in that same period.

NEXT: ACA driving a focus on retirement benefits

Of SBOs who plan to offer retirement benefits in the future, 25% say the Patient Protection and Affordable Care Act (ACA) has made health benefits less attractive to employees, and 18% say the ACA has decreased company health care costs. Of SBOs who plan to increase company contributions to their employees’ 401(k) plans, 33% say the ACA has made health care benefits less attractive to employees, and 30% say the ACA has decreased the company’s health care costs.

“Lower health care costs means small business owners have the option of contributing more to their employees’ retirement,” says Joe Frustaglio, vice president and leader of private sector retirement plan sales at Nationwide.

As the ACA makes health care benefits less relevant to small business employees, there is mounting evidence that business owners are turning to retirement plans to recruit and retain employees.

According to the survey, among SBOs, 59% disagree that retirement benefits are not important for attracting and retaining employees. More than two in five (42%) SBOs who said they plan to increase contributions agree their company’s 401(k) plan is now more important for attracting and retaining employees as a result of the ACA. Similarly, nearly one-quarter (24%) who will offer retirement benefits in the future say their company’s 401(k) plan is now more important for attracting and retaining employees because of the ACA.

The 2015 Small Business Owner Study was conducted between June 8 and June 19, 2015, among 500 U.S. small business owners, defined as companies with less than 300 employees.

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