Study shows increase in average 401(k) balances

Buoyed by a stronger stock market, American workers increased their average 401(k) retirement savings account balance from $69,100 at the end of last year to $74,600 at the end of March 2012, according to Fidelity Investments, the largest 401(k) administrator in the U.S.

Most of that growth was attributed to the stock market, which rose 11.2 percent in the first quarter and has doubled in value from three years ago, a point considered the nadir of the bear market.

Although 401(k) balances sometimes increase slightly in the first quarter because of the automatic increases in many plans, this continuing climb was encouraging because 401(k) retirement savings accounts and other retirement investments have taken such a hit in recent years. Investors have also found little help in alternative investments such as savings accounts and CDs since interest rates have been so low.

Not only have many workers had to stop saving, many have had to raid their savings to pay expenses during times of unemployment or other economic setbacks. It also hasn't helped that many employers have suspended matching contributions. At the end of the first quarter 2009, the average account balance was $46,200 -- well below the seven to 10 times your annual income that many experts say is necessary to retire at your current standard of living.

About 20 percent of the 8 percent increase in the average balance came from increases in employee and employer contributions, Fidelity said, with the other 80 percent coming from market gains. This suggests more employees may be taking advantage of annual increase programs, which typically raise savings rates by 1 percent a year.

Despite the increasing savings rates and 401(k) balances, most savers are still a long way from ensuring a comfortable retirement for themselves. The average annual employee contribution rate of 8 percent -- a savings rate that's held steady the last three years -- is still below the 10-15 percent contribution that many advisers cite as optimal.

The average 401(k) savings account balance at the end of 2011 -- $69,100 -- was down slightly from the year before, but this was seen as an encouraging sign nonetheless. More younger workers, who have smaller 401(K) balances, helped drive down the average. In addition, the stock market in 2011 was far less robust, and foreign stocks that make up a part of many 401(k) investments were pushed down by economic uncertainty in Europe.

New rules aim to boost transparency on 401(k) fees

Starting July 1, the U.S. Department of Labor plans to implement new rules that will require 401(k) managers to more clearly disclose the fees they charge for their services. The Department says this move will help improve transparency and allow 401(k) owners to better understand how much they are paying for the investments they make through their retirement savings plans.

According to SmartMoney, about $4.3 trillion is currently invested in 401(k) savings accounts, and "rough estimates" place the amount financial management firms siphon off for fees between $30 billion to $60 billion a year.

Although fund managers have defended their fees, many 401(k) savings account participants aren't aware how much their fees are or even that they exist, according to industry analysts. But that will change by Aug. 30 this year, the deadline for fund managers to send information outlining their fees to all plan participants.

The new rules also place more responsibility for tracking the fees on the shoulders of plan providers, which are typically employers. Employers will be required to review fee disclosures, request missing information and report unanswered requests to the Department of Labor within 90 days.

It's not certain how the new disclosure rules will affect "revenue sharing" practices, in which fees are not charged by fund managers to participants. In revenue sharing, fund managers instead earn money by directing 401(k) investments into mutual funds that return a portion of their fees to the manager. According to critics, this process can lead fund managers to be more interested in their own earnings than in how much their clients earn.

It's also uncertain how much the transparency could impact the cost of 401(k) savings account administration. Although one goal is to make the field more competitive and force firms to reduce costs, that result depends on employers being willing to shop around for cheaper administrators who can still ensure a good return on their participants' investments. Participants themselves will still have little influence on the retirement plan their employer chooses.

In response to the new Labor Department guidelines, 401(k) fund managers have asked the federal government for permission to email information to plan participants rather than mailing printed information. Requiring paper statements is expensive and could force fees higher rather than lower, trade groups said.

401(k) contributions rise slightly in 2011

U.S. workers stuck with their retirement savings rates despite a tumultuous year in the stock market in 2011, according to a new study from Fidelity Investments.

The study indicates employee contributions to 401(k) retirement savings plans rose slightly in 2011 to $5,750 as workers continued to sock away more than 8 percent of their annual earnings into these retirement investments.

Fidelity, whose 11.6 million 401(k) account participants is the largest in the industry, said the average 401(k) retirement savings account balance at the end of 2011 was $69,100. That is $300 less than the average balance at the end of 2010, but there were a number of factors that made that an encouraging sign:

  • The average balance remained essentially flat even though more younger workers are opening retirement savings accounts. Younger workers typically have much lower balances, which drags down the average.
  • The average balances and investment levels were sustained despite a rocky market year. Stocks rose in early 2011 and then tumbled over the summer before rallying at the end of the year. Many foreign stocks, a part of many 401(k) investments, were dramatically affected by economic uncertainty in the European Union.
  • More employers were at least partially matching workers' contributions. The percentage of workers getting money from their bosses increased from 79 percent at the end of 2010 to 82 percent last year, and the average employer contribution increased from $3,170 to $3,270.
  • Since the market meltdown four years ago that reduced average 401(k) investments to $46,200, the number of workers increasing their contributions has far outpaced the number who are cutting them.

The Fidelity study pointed to the increasing popularity of target-date funds, in which people invest in funds designed with their prospective retirement age in mind. Funds for older workers reduce their exposure to risky investments while younger workers are invested in funds with higher growth potential under the assumption that they have more time to recover from sharp, short-term losses.

Fidelity also found that fewer workers were transferring money between investment options. Despite the volatility of the market in 2011, only 10 percent moved money around, down from 15 percent in 2006. This, Fidelity said in a news release, may be attributed to more target date funds and "an appreciation of a long-term, steady approach to retirement saving."

New rules seek to boost transparency

Workers will soon be able to assess retirement plans better when new rules from the U.S. Department of Labor require 401(K) fund administrators to plainly state how much plan participants are paying in fees. Fees are charged for management, record-keeping and other services, and the amount individual participants pay are not always obvious.

The new rules are expected later this year or early next year, and they should make it easier for retirement savers to determine the best savings accounts for their needs.

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