Data and Research August 17, 2022

Workers Weather Market Uncertainty to Save for Retirement

In 2022’s second quarter, average retirement plan balances dropped less than the S&P, which was down 16.1% for the period.

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Workers are continuing to save for retirement despite 2022’s economic uncertainty, decreased account balances and market volatility, new research shows.

Fidelity Investments’ second-quarter 2022 analysis of savings shows that while average retirement account balances dropped, losses were less severe than the market’s declines in Q2. The losses were similarly outstripped by those in the last period of high market volatility that investors experienced, the first quarter of 2020.   

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Average 401(k) balances dropped to $103,800 in Q2, down 20% from a year ago and 15% from Q1 2022; average 403(b) account balances decreased to $93,300, down 18% from a year ago and 13% from the last quarter. Meanwhile, average individual retirement account balances slipped to $110,800 in Q2—a 17.9% decrease from a year ago and a 12.8% decrease from last quarter, Fidelity found.

Investor headwinds came from market losses, including Q2’s 16.1% decline in the S&P 500. But the Fidelity research shows that retirement plan participants are still making the effort to follow a retirement roadmap by saving sufficiently, said Kevin Barry, president of workplace investing at Fidelity Investments, in a statement.   

“Although many Americans are understandably concerned about the economy, record-high inflation and markets at this time, it’s encouraging to see the prevailing emotion has been to stay calm and focused on one’s retirement objectives,” he said. “Saving for retirement is a goal that is decades in the making, and there will naturally be many twists and turns. However, the best action savers can take to help achieve success is to consistently save and invest.”

Fidelity found that Gen Z experienced the smallest account balance declines. For Gen Z retirement savers who are invested in target-date funds, the average account balance dropped by 8% from Q1. Among Gen Z retirement plan participants, in Q2, 85% of savers had their entire their 401(k) savings in a target-date fund.

The research shows that despite the challenges to saving, 95% of retirement savers did not make any changes to their asset allocations, while 5% of 401(k) and 403(b) savers did so in Q2, which is slightly lower than the 5.3% who made a change in Q1 and is consistent with the share of individuals who made a change to their allocation in Q2 2021. Among participants who made allocation changes in Q2, 85% made a single change, the most frequent of which was a shift of savings to more conservative investments (38%).

Fidelity research also found—by comparing account balances—that plan participants who quit deferring to a retirement plan after an economic shock, down market or recession do so to their detriment, as they end up within smaller amounts of accumulated savings. A Fidelity thought experiment to study the impact on participant savings of staying the course after the Great Recession has investors start with a $400,000 retirement balance, and then examines the plan balances five years later.

According to Fidelity, an investor who invested assets in all cash and quit saving in a retirement plan after the Great Recession would have $353,400; an investor who moved to cash and continued to contribute accumulated $404,709; and an investor who stayed invested and continued to contribute achieved $524,600.

Barry emphasized that it’s important for retirement investors to remain committed to their investment strategy to not miss out on market gains. 

“When it comes to the markets, we often observe that sharp drops are quickly followed by a corresponding rise,” Barry said in the statement. “This pattern occurred with the last period of market volatility in 2020, where that first quarter decline was followed by a double digit rebound across retirement account balances—and by the end of 2020, retirement balances had reached record highs. This speaks to the importance of looking long-term and not over-reacting, so you are able to take advantage of any market peaks.”

Compliance August 16, 2022

Managed Account Fees Challenged in Latest ERISA Lawsuit

The lawsuit comes as retirement plan sponsors and participants express increased interest in personalization and managed account services.

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Plaintiffs have filed a new Employee Retirement Income Security Act lawsuit in the U.S. District Court for the Northern District of Illinois, naming the Dover Corporation and various related entities as defendants.

The proposed class action lawsuit suggests the Dover Corporation permitted the payment of excessive recordkeeping and managed account fees within the defined contribution retirement plan it offers to its employers. The suit also suggests the plan fiduciaries’ retention of the managed account provider, Financial Engines, constituted a violation of ERISA.

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“Defendants, as fiduciaries of the plan, breached the duty of prudence they owed to the plan by requiring the plan to pay excessive recordkeeping fees and managed account fees, and by failing to timely remove their high-cost recordkeepers,” the complaint states. “These objectively unreasonable recordkeeping and managed account fees cannot be contextually justified and do not fall within the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

According to the complaint, the defendants “unreasonably failed” to leverage the size of the plan to pay reasonable fees for plan recordkeeping and managed account services.

“ERISA’s duty of prudence applies to the conduct of the plan fiduciaries in negotiating recordkeeping and managed account fees based on what is reasonable (not the cheapest or average) in the applicable market,” the complaint states. “The unreasonable recordkeeping and managed account fees paid inferentially tells the plausible story that defendants breached their fiduciary duty of prudence under ERISA. These breaches of fiduciary duty caused plaintiff and class members millions of dollars of harm in the form of lower retirement account balances than they otherwise should have had in the absence of these unreasonable plan fees and expenses.”

Dover Corporation declined to comment about the allegations in the lawsuit.

The suit’s filing comes in the wake of multiple prior suits that have included substantially similar allegations against other defendants who hired and retained Financial Engines as a managed account provider. In the new lawsuit, Financial Engines itself is not named as a defendant, but its actions and operations feature in the allegations.

Some of the prior cases, on the other hand, have included allegations leveled directly against Financial Engines, such as in the ERISA lawsuit filed in 2018 against Home Depot. In that case, the district court issued a detailed ruling that addressed respective motions to dismiss filed by Alight Financial Advisors, Financial Engines Advisors and the Home Depot defendants. The court granted Alight’s and Financial Engines’ motions to dismiss, in which the defendants argued they were not, given their contracted roles and inability to set their own compensation levels as service providers, liable for the fiduciary breach claims alleged in the suit. The dismissal motion filed by the fiduciary Home Depot defendants, on the other hand, was denied.

The new case against Dover Corporation comes at a time when the broader retirement plan industry is increasingly focused on personalized investment services. Experts say lower fees, more services and new distribution methods might make managed accounts worth a new look for DC plan sponsors.

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