Data and Research May 9, 2019

Fidelity Analysis Shows Advantage of Long-Term Investing for Retirement

In the decade following the Great Recession of 2008, for participants who remained invested in their 401(k)s, overall, average balances soared 466%.

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Fidelity Investments took a look at the balances of participants who remained invested in their 401(k) in the decade following the Great Recession of 2008. Overall, average balances soared 466%, from $52,600 in the first quarter of 2009 to $297,700 in the first quarter of 2019.

Among Millennials and Generation X, the growth was even more pronounced. Millennials’ balances rose 1,762%, from $7,000 to $129,800. Gen Xers’ balances rose 626%, from $37,000 to $268,900. Baby Boomers’ balances rose 367%, from $76,500 to $357,200.

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Fidelity also looked at how different generations fared if they had remained invested for 15 years. Boomers’ balances rose to $430,500, while those of Gen Xers reached $347,200, and Millennials, $152,400.

“When I think about the onus of American workers having to save from their paycheck for their own retirement, despite the market volatility, people are staying the course, saving more and taking advantage of the match, which is fantastic news,” Katie Taylor, vice president of thought leadership at Fidelity Investments in Boston, tells PLANSPONSOR.

In periods when the market is volatile, the volume of incoming calls to Fidelity’s call center rises, but once investors are told to focus on the risk tolerance appropriate for their age as well as their long-term goals, they seldom change their investments, Taylor says.

Fidelity also took a look at the use of target-date funds (TDFs) in the past 10 years and found that in 2009, 16% of individuals had all of their savings invested in a TDF. By the first quarter of 2019, that rose to 52%. In addition, a much lower percentage of individuals had all of their savings in stocks, declining from 15% to 7% in that 10-year period.

Fidelity’s “Building Financial Futures” report also showed that defined contribution (DC) plan participation continues to climb. In 2008, the average participation rate was 65.8%. By 2018, it was 73.5%. Among plans with automatic enrollment, those percentages went from 79.9% to 88.3%, while participation rates in plans without automatic enrollment ticked downward from 56.6% to 52.3%. Fidelity notes that 91% of employees who are automatically enrolled do not opt out, and that participation among Millennials has increased by 82% in the past 10 years, due in part to automatic enrollment.

Fidelity finds that among those plan sponsors using automatic enrollment, a record 26% are now using a deferral rate of 4% or higher, up from 27% in 2014. Average DC plan savings rates, including both employee and employer contributions, have risen from 11.9% in 2009 to 13.5% in 2019. For the 12 months ended March 31, 2019, employees have contributed an average of $6,940 to their DC plan, and employers have given their workers an average match of $4,040.

“Following the passage of the Pension Protection Act, we have seen a rapid increase in the number of employers adopting automatic enrollment with target-date funds as the default investment, as well as managed accounts,” Taylor adds. These plan design elements have had a direct impact in the increase in 401(k) balances in the past decade, she says. 

Fidelity’s report also shows that the percentage of plans offering a Roth 401(k) rose from 46.0% in 2014 to 68.9% in 2019, and the percentage of participants contributing to a Roth went from 5.4% in 2009 to 11.2% in 2019.

However, the percent of participants with outstanding loans remains high. It was 19.5% in 2009 and 19.9% in the first quarter of this year. Fidelity says that while many employers are offering financial wellness programs to discourage leakage, this does not appear to be working. The most common reasons participants gave for taking out a loan were to pay down debt (31%), make home improvements (24%), buy a home or refinance a mortgage (21%) and to pay outstanding bills (19%).

First Quarter 2019 Observations

The average 401(k) balance rose 8%, from $95,600 at the end of 2018 to $103,700 by the end of the first quarter of 2019, primarily due to the strong returns in the first quarter. Year-over-year, however, the average balance was up only 1% from $102,900 in Q118. The average individual retirement account (IRA) balance increased to $107,100, a 9% increase from the previous quarter and a 2% rise from a year earlier.

The number of people with $1 million or more in their 401(k) increased to 180,000, up from 133,800 at the end of 2018, while the number of IRA millionaires reached 168,100, up from 138,800 last quarter.

Individuals saving in both an IRA and a workplace savings plan had an average balance of $307,600, a record high and a 9% increase from $281,000 at the end of 2018.

The average 401(k) employee contribution in the first quarter of the year reached a record $2,370, a 15% increase from a year earlier. The average match was $1,780, a 6% increase from one year earlier.

“One of the most important aspects of a retirement savings strategy is making sure you’re contributing enough to reach your goals,” says Kevin Barry, president of workplace investing at Fidelity. “While the growth of account balances is due to a combination of market performance and saving, both are critical to reaching long-term retirement savings goals. Fidelity recommends saving at least 15% of your income for retirement.”

Compliance May 9, 2019

Former Hospital Employees Sue Archdiocese Over Pension Plan

The case is similar to other cases that have been filed on the federal level challenging a pension’s “church plan” status, but this complaint alleges that the actions taken by the Archdiocese violate New Jersey contract and trust law.

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Former employees of Saint James Hospital filed a lawsuit in the Superior Court of Essex County against the Archdiocese of Newark, New Jersey, over pension plan benefits.

The case is similar to other cases that have been filed on the federal level challenging a pension’s “church plan” status, but this complaint alleges that the actions taken by the Archdiocese violate New Jersey contract and trust law.

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According to the complaint, filed on behalf of approximately 135 individuals, the Archdiocese promised guaranteed benefits for life, but the benefit payment for the plaintiffs and other affected retirees stopped in 2017. This is due to the Archdiocese failure to fund the plan.

The pension plan was operated under the Employee Retirement Income Security Act (ERISA) following its passage in 1974. In 1988, the Archdiocese notified past and present employees that it planned to terminate the plan, but plan termination was not approved by the Pension Benefit Guaranty Corporation (PBGC) because the plan did not have enough assets to pay all covered benefits.

That’s when, the plaintiffs allege, “the Archdiocese developed a strategy to escape PBGC scrutiny and the protections of ERISA.” In 1990, the Archdiocese sent a letter to the IRS asking it to deem the pension plan a “church plan” under ERISA. The IRS granted the request.

“The Archdiocese concealed the IRS ruling from plan participants and did not provide the participants new plan documents describing the rules that governed the plan in the absence of the ERISA rules,” the complaint says.

Around 1997, the Archdiocese then terminated the pension plan. According to the plaintiffs, though it had $20 million in surplus assets, it did not use that to plug a $2.7 million deficit in the pension plan funding. The Archdiocese transferred the assets of the plan to a non-guaranteed account at Transamerica.

The plaintiffs allege that Transamerica tried numerous times to warn the Archdiocese that it was running out of money to fund pension benefit payments, but the Archdiocese took no action. On November 3, 2016, Transamerica sent a letter to the affected retirees which stated: “We regret to inform you that Transamerica has not received any deposits to the plan for a number of years. As a result, the plan’s assets are diminishing and we anticipate that they will be depleted in approximately five to seven months, depending on the investment performance of the assets. Once the plan assets have been entirely depleted, no further pension payments will be processed by Transamerica.”

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