401(k) Accounts Reach a 10-Year High, but Not High Enough

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There's good news about your 401(k)--and bad.

Right now the average 401(k) balance stands at a 10-year high. That's according to Beth McHugh, vice president of Fidelity Investments, which administers some 17,000 retirement plans for 11 million would-be retirees. 401(k)s, which have been around for 30 years, are the most widely used vehicle for saving for retirement.

By the end of 2010, says McHugh, the average account balance had risen to $71,500. Savers who've been actively contributing to an account for ten years saw their average balance hit $183,100, up from $59,100 at the end of 2000. Those increases are attributable in part to the rebound of the stock market and to the fact that 401(k) participants are saving more: For seven straight quarters, Fidelity says, participants have been increasing the part of their paychecks that they're saving, from 3 percent to a little over 6 percent.

Contrary to myth, says McHugh, most employers did not suspend making matching contributions to employee 401(k)s during the recession. A few high-profile companies, including FedEx, did suspend them, earning headlines. But even during the very worst of the recession, between 2008 and 2009, only 8% of employers reduced or eliminated their matching contributions. And since then, she says, more than half of those have reinstated their matching contributions or have said they plan to do so in the next 12 months. Bigger companies—ones with 5,000 or more employees—are in the vanguard of that trend, with over 70% saying they've already reinstated matching funds or intend to do so.

McHugh refutes another misconception: During the recession, she says, most people did not cash out or take loans against their accounts. Only one out of five participants took out a loan. Even seven out of ten employees who lost their job, were laid off, or otherwise separated from an employer resisted the temptation to cash out their account.

Fidelity's findings derive not just from the behavior of higher-income savers but from lower-income ones as well. More than half (53 percent) of the participants in 401(k) plans earn between $20,000 and $40,000; 71 per cent earn $40,000 to $60,000.

Retirement Decisions for Baby Boomers

So far, so good.

But while 401(k)s on average have emerged from the recession in surprisingly good health, many savers on the cusp of retirement are finding that good isn't good enough.

A study commissioned by the Wall Street Journal from the Center for Retirement Research at Boston College finds that the median household headed by a person aged 60 to 62 with a 401(k) has less than one-fourth the amount of savings in that account tha he needs, if he wants to maintain his current standard of living in retirement.

The amount of income needed, said the study, is a little over $74,000. The median household can expect to get income of slightly more than $9,000 from a 401(k) and about $35,000 more from Social Security. That leaves a shortfall of almost $30,400.

Even if the householder is lucky enough to have a pension to boot, he's still short by almost $4,000,according to the Boston College study.

Fidelity's McHugh said savers are hardly blind to these facts. They're all too aware of them and are taking steps to compensate.

One thing they are not doing, she said, is doubling-down: They are not reallocating money so as to enjoy a higher return in exchange for running higher risk. "One thing we have not seen," she said, "is folks taking higher risk. Rather, they are moving into more age-appropriate allocations. Perhaps they had too much exposure to equities before. Now they're opting for a plan that will better serve them in the long run."

Retirement expert Doug Orton said most baby boomers facing this predicament are choosing to work longer rather than rejigger their investments to try to get a higher return. Orton, vice president of business development for MFS, a global asset management firm said, "It's much more likely that they'll opt to work longer. Their willingness to take more risk went down significantly after the downturn."

Is it possible that the Boston College analysis paints too dark a picture? Jack VanDerhei, director of research at the Employee Benefit Research Institute thinks it does, since it takes into account only the householder's 401(k) account with his current employer. It's quite possible, notes VanDerhei, that someone aged 60 has worked more than one job in his career and may have other 401(k) accounts in addition to his current one.

While he regards Fidelity's average account balance of $71,500 as "a big improvement over last year," he also calls it a "meaningless number" as regards retirement, since it includes savers of all ages and the 401(k)s of savers who have been with their current employer only a few years. Even Fidelity's figure for plan participants who've been active savers for 10 years excludes, say, the additional 401(k)s that might belong to someone aged 60 who's been with his current employer only ten years.