May 3, 2012 -- At the peak of his retirement savings, around 2006, John Taylor had about $66,000 in his employer-sponsored 401(k) -- until the recession and a chain of unexpected events drained his fund completely.
Taylor's story may sound unthinkable to many American workers who don't think twice about their employer-sponsored 401(k) plans, which allow workers to set aside untaxed dollars that can accumulate tax-free until retirement. But the Loveland, Colo., 55-year-old's experience can serve as a reminder for those with short-term memories who experienced major retirement account losses as a result of the most recent recession.
The average 401(k) balance rose to $74,600 at the end of the first quarter, up 8 percent from the same period a year ago among Fidelity Investments' 11.8 million accounts, the company reported on Tuesday. The balance increased 62 percent since the end of the first quarter 2009, which is considered the low of the market downturn from 2008 to 2009. In the first quarter of 2009, the average balance was $46,200.
Taylor, a native New Yorker, had been a maintenance worker for a small company in Colorado for 19 years until he was laid off in November 2008. Taylor said he contributed about $100 to $200 per month, sometimes sporadically, to his 401(k) while at that company.
While collecting unemployment in 2009, he first pulled about $10,000 out of his 401(k), which had already dwindled to about $44,000, to support his wife, son and two grandchildren.
He collected unemployment until July 2010, which is when he got a maintenance job for a company in Boulder. He was only at his job for 11 days when he had a work accident while trimming a tree, breaking his wrist and causing ligament damage in his left arm.
Unable to obtain another job and with physical injuries from his accident, Taylor said he also relied on workman's compensation of $240 a week, which ended in June 2011. He was told by his physician and social service worker that he needs to find another vocation.
"At 55, that's kind of hard to do," he said.
No longer eligible for unemployment benefits because of claim limits, Taylor said he exhausted his 401(k) savings by January of this year to make car payments and pay for other expenses. He has been eating from food banks, which he said has contributed to his weight gain of 30 pounds.
"All they give you is bread, pasta and, every two months the local church gives you meat," he said. "Friends give me wild game because I haven't hunted in a couple years, either. That helps because you fill your freezer that way. It's pretty bleak for a lot of people."
Taylor is now applying for disability benefits.
When asked if he would contribute to another employer-sponsored 401(k) fund if given the opportunity, he said, "That's a hard question because I think I would need better financial advice."
"I don't think we were given good enough advice through my previous company," which had about 50 employees, Taylor said. "They were saying, 'diversify, diversify,' and I had five different funds," he said. "They just give you choices and you never see them again."
Brooks Herman, head of research with BrightScope, a free online 401(k) ratings and information firm, said smaller companies, in which a human resources executive is managing payroll, hiring and a company's retirement options, may not be updating a company's 401(k) options to the employees' benefit.
"A lot of times a plan sponsor will lock in a price when there were 50 people in the company and now there are 1,000 with an antiquated pricing structure," he said, instead of actively managing a 401(k) plans' fees, for example.
Gloria Moss, 66, said she was much more proactive about her retirement planning after she lost about half of her 401(k) balance in 2008 because of the downturn. An educator for a public school system in South Florida, Moss eventually recovered more than three-fourths of what she lost with the help of a financial advisor who helped her diversify her investments. Now she is "very active" in checking her retirement status and cutting back on expenses to save more.
Before losing a chunk of her retirement losses, she had hoped to retire four years ago. Now she hopes to retire in the "not too far future."
"I feel much more optimistic, in general. Not that I've had great income, but I feel like things are going in the right direction for me," she said. "Around me, I see real estate is picking up and more stores are opening."
Beth McHugh, vice president of market insights for Fidelity Investments, said she has noticed a growing culture among employers and employees of trying to save more in a smarter way.
"What we're seeing is a continued commitment from individuals and employers in the notion of embracing a culture of savings," she said.
More individuals are calling to seek guidance, McHugh said, asking, "What are the levers that I can pull to help me reach my retirement goals?"
More employers are choosing to automatically enroll employees in 401(k) plans and institute automatic employee contribution increases annually.
The median 401(k) balance at the end of this year's first quarter was $23,000, according to Fidelity Investments' quarterly report. That's mostly unchanged from the $24,000 a year ago in the same period. But it's an improvement from the first quarter of 2008, when the median 401(k) balance was $18,900.
McHugh pointed out that the median and average figures include a wide range of 401(k) participants and that the older participants tend to have a higher balance. A subset of Fidelity account holders older than 55 who had participated through 10 years had an average of $237,600.
McHugh said the rule-of-thumb is to continue saving 10 to 15 percent of your income for retirement. But "the closer you are to retirement, the more critical it is you have an age-appropriate allocation when facing a volatile market," she said.
An improving stock market is the main driver behind the increase in the average balance in the first quarter this year, accounting for 80 percent of account balance growth. Participant and employer contribution growth contributed to the remaining 20 percent boost.
The S&P 500 index, though experiencing two straight days of losses, has increased more than 11 percent year-to-date.
"Obviously, the market has been performing well and did so in the first quarter," McHugh said.
She said individual and employer contributions also tend to fluctuate based on market performance. Last year in the same period, two-thirds of balance growth was attributable to the stock market while one-third was because of participant and employer contributions.
Herman said that while 401(k) funds can be helpful savings vehicles, many employees mistakenly believe there are no fees involved.
Some plans have fees as high as 2 to 3 percent a year, which the employer or 401(k) company has not clearly disclosed.
"If you save 8 percent for your 401(k), you may be losing 2 percent of that a year without being aware of it," he said.
That will change this summer when financial regulatory reform will mandate greater transparency for 401(k) fees.
"This will be an awakening for millions of Americans who don't think they pay fees," he said. "Participants will then ask, 'Is this a reasonable fee?'"