Data & Research August 3, 2017

DC Plans Riding High on the Equity Markets

Fidelity’s second-quarter 2017 401(k) plan analysis shows record balances tied to strong performance in the stock market.
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Positive stock market performance and increasing contributions drove average 401(k) and individual retirement account (IRA) balances to record levels during the second quarter of 2017, according to data shared by Fidelity Investments. 

Both IRAs and 401(k) plans are up nicely compared with this time last year. The average IRA today has $100,200 invested, up from $89,600 last year and $73,100 five years ago, while the average 401(k) holds $97,700, up from $89,100 last year and $73,300 five years ago.

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Far and away the most impressive gains were measured among those people who actively maintained and contributed to their 401(k) account for the preceding 10 years. This group, Fidelity reports, saw their balance increase to a record average of $266,100, up from $78,800 in Q2 2007.”

“The 10-year growth is attributed to 53% market action and 47% employee contributions, which shows the benefit of saving and investing with a long-term view,” Fidelity experts observe. Also notable, Fidelity’s yearly analysis of small business retirement plans, which includes self-employed 401(k) accounts, self-employed (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, indicates average balances have increased by double digits since Q2 2016. In particular, the data shows the average balance for self-employed 401(k)s increased 10% to $162,700, while the average balance for SEP IRAs increased 14% to $100,400. The average balance for SIMPLE IRAs grew to $39,000, an increase of 10% from Q2 2016.

Not all the signs in the analysis are positive, of course. For one, rising stock markets could very likely lead to overexposure in equities among 401(k) and IRA investors not taking advantage of automatic rebalancing; Fidelity says target-date funds and managed accounts can help keep investors on track. Beyond this, Fidelity’s analysis shows more than one in five employees did not contribute enough to their 401(k) to take full advantage of their company’s matching contributions.

Fidelity researchers suggest the stock market’s performance over the last several years “means people may have a greater allocation of stocks in their 401(k) accounts than we would recommend. This could expose their retirement savings to unnecessary risk in the event of a market downturn.”

Again highlighting the value of managed accounts and TDFs, Fidelity found that fully 40% of those who managed their own 401(k) asset allocation had a stock allocation in their 401(k) that was higher than recommended, up from 38% in Q2 2016.  

Data & Research August 2, 2017

Sound Advice Can Propel Retirement Savings Contributions

With less than generous government retirement income provisions, Americans can benefit from effective advice about managing finances in order to contribute more to retirement savings plans.
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Individuals in the United States face pressing challenges when it comes to saving for retirement, according to a study by the International Longevity Centre-UK (ILC), supported by UK-based Prudential plc.

The research found that in order to secure a comfortable retirement, Americans now must save between 11% and 18% of their annual income. If individuals today fail to save, they would face a projected intergenerational gap of $10,000 a year or 20% of earnings.

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However, the ILC says several changes can be made to reverse this trend. These include increasing private pension coverage and contributions. While the former would rely on a political victory, the latter may depend on how effective those in the retirement services industry are in helping participants manage their finances in order to save more for retirement. Another task would be encouraging participants, especially younger ones, to start saving as soon as possible.

The ILC notes that “With increasing emphasis on personal responsibility for retirement planning, people will need to be able to understand the benefits of deferring consumption for a later date, the value of investing in assets other than cash, the importance of asset diversification, and the virtues of buying some form of longevity insurance at the point of retirement.”

These efforts can be facilitated through sound financial wellness programs. Considering the national student loan debt is at a record high, participants young and old can benefit from student loan repayment assistance. And while products such as annuities are gaining considerable notice in the industry, they remain complex contracts for many Americans. Thus, robust and targeted education is also an essential piece to closing the intergenerational savings gap. 

These tasks are ever more important as the firm points out that public expenditures on Social Security in the U.S. is relatively low as a proportion to Global Domestic Product (GDP). Moreover, the pension system itself seems to be diminishing in the U.S. The report found that only 28% of those earning at least $75,000 a year are saving in a pension, and that figure drops to 3% when it comes to those making $25,000 a year or less.  

Getting people to save more in their pensions can also be assisted by plan design tweaks. Much research in the defined contribution space points to the benefits of automatic features like auto enrollment and auto escalation.

The ILC states “Two public policy options look to be particularly successful in this regard, one which compels people to save as per the Singaporean, Hong Kong and French systems and another which ‘nudges’ people to save as per the UK’s auto-enrolment system. Simply hoping that people will save is unlikely to be sufficient.” Furthermore, an opt-out option to automatic features can prevent significant backlash from employees not interested in saving. But with that regard, education and financial wellness can come into play in order to spread awareness of the importance of saving, while boosting participation.

The ILC concludes that “Raising capability does not just happen overnight. This must be supported by a financial advice market that works for the many and not the few, in conjunction with new advice models that utilize technological advancements such as robo advice to make advice more accessible, understandable and cost effective. Finally, there will always be people who are inert and do nothing in the face of complex decisions. Good product defaults that avoid the worst outcomes will be important in this regard.”

“The Global Savings Gap” by ILC- UK can be downloaded at ilcuk.org.  

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