Participants Learned Hard but Good Lessons

Although account balances were shrinking due to large market losses, participants became better diversified in and more engaged with their retirement savings plans, according to Fidelity’s 2008 State of the 401(k).

Workers calling Fidelity spiked to over 100,000 calls per day in late September through early October. Call volume peaked at 120,000 calls on October 10, the day the Dow Jones Industrial Average closed below 9,000 for the first time in five years, according to a Fidelity press release.

In addition, the Web site for Fidelity workplace savings participants also experienced record numbers in the fourth quarter with 4.6 million unique visitors visiting the site in October, an increase of 14% over the same period in 2007. Nearly one million workers in 2008 also utilized one of the retirement savings planning tools provided by Fidelity on the Web site.

Better Diversification

Fidelity Investments’ found the percentage of participants holding 100% equities in their workplace savings plan dropped to 16% at the end of 2008 from more than 20% at the end of 2007. In addition, as of the end of 2008, company stock made up about 10% of Fidelity’s overall assets in workplace savings accounts, down from over 20% in early 2000.

Based on the analysis of Fidelity’s 17,095 corporate 401(k) plans representing over 11 million participants, in 2008 participants contributed an average of $5,600 (pre-tax earnings) to their 401(k) accounts, slightly higher than 2007 levels. Workers continued to contribute to their plans, even in the difficult fourth quarter of 2008, with 96% of active 401(k) participants as of the third quarter continuing to contribute in the fourth quarter, Fidelity said.

Participants stayed on track even as unprecedented market declines resulted in the average workplace savings account balance dropping 27% in 2008.

Fidelity said plan sponsors continued to show a belief that encouraging employees to save is even good in hard times, as they continued to adopt and use auto plan solutions. Adoption of auto enrollment rose to 16% in 2008 from less than 11% in 2007. Companies using auto increase rose to nearly 74% in 2008 from about 70% in 2007.

By the end of 2008, more than 60% of plans in Fidelity’s system were using lifecycle funds as a default option, up from 38% at the end of 2007 and just over 5% at the end of 2005.

In addition, Fidelity found the number of companies suspending their matching contribution represents less than 1% of the Fidelity plan sponsors that offered a match at the end of 2007.

Participants Leave 401(k) Accounts Intact

Fidelity saw loans and transfers decrease and hardship withdrawals increase.

Fidelity found fewer employees initiated a loan in 2008 (9%) when compared with 2007 (9.7%). For those who did take a loan in 2008, the average amount was $8,400.

Hardship withdrawals continued to trend up, but still remained a small percentage of Fidelity’s active participant base. The average hardship withdrawal amount decreased slightly in 2008 to $6,000, Fidelity said in a press release.

The portion of participants executing a transfer from one investment option to another was 13.9% in 2008, a slight decline from the 2007 level of 14.2%. Participants with 100% in lifecycle options had a significantly lower transfer rate than the overall participant base.

In the fourth quarter, only 1% of lifecycle fund holders made a transfer compared with the overall average of 6.1%. For the year, an average of 2.9% of 100% lifecycle fund holders made a transfer compared with the 13.9% of the overall participant base.

Transfer activity was the heaviest for participants with the largest account balances. More than 37% of participants with $250,000 or more made one or more transfers during the year, while only about 10% of participants with balances from $5,000 to $10,000 made a transfer in 2008.