401(k)s Bounce Back, but Trouble Ahead
PHOTO: Gloria Moss

Gloria Moss, 65, lost about half of her 401(k) balance in 2008 when the economy took a turn for the worse. So with a wrench thrown into her retirement plans, she continued working full-time as an educator in Florida.

But when the economy started to rebound, and with the help of a financial adviser, she recovered about three-fourths of what she'd lost.

"As a result of that and because the market is better, things have improved. In the last year or so, I think things have come back considerably," Moss said.

Moss had hoped to retire three years ago, and even if she retires now, she'll have to live on $30,000 a year less than what she lives on currently.

"I think I underestimated what I would need, Moss said. "I hope that young people are looking at my story and starting to save more."

Americans have never been the best of savers, especially when it comes to retirement. But a new report finds that the average 401(k) balance has surged past the peak set before the mortgage meltdown.

According to financial services company Fidelity Investments, the average balance from the end of the first quarter was $74,900, a record since the company began tracking this data in 1998. That average balance increased almost 12 percent from a year ago, and 58 percent from the same period in 2009.

But the median balance of a 401(k), which allows people to set aside untaxed dollars that can accumulate tax-free until retirement, was $24,000. That amount is well below what financial planners recommend for those nearing retirement.

The good news is that the average 401(k) balance is significantly higher for account holders who contributed for 10 years continuously: For them, it's $191,000. And of that group, the average balance for those who are 55 or older was $233,800, according to Fidelity.

Also, almost one in 10 participants increased his or her deferral rate, or one's contribution as a percentage of income, the largest percentage since Fidelity began tracking that figure in 2006.

Beth McHugh, vice president of market insights for Fidelity Investments, said that more employees are taking advantage of their 401(k) plans to maximize their savings.

"They're realizing that this is going to be a big part of their retirement nest egg and taking full advantage of it," she said.

Chris Bixby, senior financial planner with Key Private Bank, said three factors likely contributed to the rise in the average 401(k) account.

First, a rebound in the equities market, which is beginning to return to pre-downturn levels, is contributing to an increase in retirement funds. Second, the baby boom generation is becoming more serious about contributing to their retirement funds. And a number of companies have started automatic enrollment in employee 401(k) accounts.

"The automatic enrollment that people are doing is something that's good and beneficial. Education helps, it never hurts," Bixby said. "But forced participation is very good."

Higher contributions to 401(k) accounts may be encouraging news for the country -- especially as legislators consider restructuring Social Security, which has been projected to run out of money by 2037.

But most Americans still fall short of the old rule of saving at least 10 percent of their paycheck. The latest national personal savings rate is 5.5 percent, as reported by the Commerce Department April 29.

But even $74,900, which Fidelity Investments said was the record average 401(k) balance, is still not enough for those nearing retirement age, said Bixby.

"If someone is in their 50s and 60s and that's all of their retirement funds, that is woefully short," Bixby said. "They should have quite a bit more, depending on their income and standard of living."

More People Are Contributing to Their 401(ks), but Is It Enough?

Bixby estimated that if half of 401(k) balance holders are baby boomers about 10 years away from retirement or already retired -- then the balance should be at least a couple of hundred thousand dollars for a realistic retirement.

John Kutz, managing director for Victory Capital Management's Retirement Plan Services Team, said Fidelity's median account balance figure of $24,000 indicates the dire retirement picture for many Americans.

"With the Social Security trust expected to be exhausted by 2037, combined with frozen defined benefit plans, we have the situation where Americans are ill-prepared for retirement," Kutz said.

Doug Orton, vice president at MFS Investment Management, said people may be saving more than the $74,900 average balance indicates because many retirees have multiple retirement accounts.

"Because the work force is so mobile, people are rolling their 401(k) balances into IRAs when they change jobs," Orton said. "I think it's important for pre-retirees to look at their entire situation."

Orton said more clients under the age of 45 -- from generations X and Y -- said they started contributing to retirement funds in response to the recent economic downturn.

About 42 percent of those under age 45 reported that they increased their contributions to their IRA and 401(k) accounts in the past year, according to data collected Feb. 7 to 14 from MFS Investment Management. The company surveyed 596 individuals who had at least $100,000 in household investments.

"For people who used it to make regular contributions to their retirement, it seems to be working as intended," Orton said.

Orton added that it may be best to talk to a financial adviser to map out a retirement plan.

"Until you know what your goal is, you don't know if you're contributing the right amount," he said.

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