January
28, 2009
Millions of American workers lost an average of 27 percent of their 401(k) retirement savings in 2008, according to a study released this morning by Fidelity Investments.
The average 401(k) balance went from $69,200 in 2007 to $50,200 last year because of dramatic market declines, the study found.
Despite such losses, Fidelity's analysis of 11 million participants in more than 17,000 corporate plans showed that employees continued to contribute to their retirement savings and took out fewer loans against the plans than in the previous year. In fact, they added an average of $5,600 in pre-tax earnings to their accounts, a slight increase from the year before.
"Employees are staying the course, and I think this is very good news because I think it really shows that employees recognize these savings dollars are a need to have, not a like to have," said Scott B. David, president of workplace investing for Fidelity Investments. "This is a necessary savings for their financial well-being."
But in a sign that workers are struggling financially, the Fidelity study showed a slight increase in the percentage of workers who took so-called hardship withdrawals, from 1.6 percent in 2007 to 1.8 percent in 2008. Unlike 401(k) loans, hardship withdrawals require proof of a severe financial need and come with a hefty tax bill.
David said the people who took hardship withdrawals most likely did not have the option to take a loan against their plans. Historically, those who take hardship withdrawals have taken out loans first and many employers restrict the number of loans allowed.
"Once you've taken the loan, the next likely step is the withdrawal, which is a terrible thing to do because of the tax implications and the penalties," David said.
The average hardship withdrawal amount decreased slightly in 2008 to $6,000, but David attributed that to the fact that workers had less money to pull out of their accounts.
The report comes at a time when the 401(k) concept is under intense scrutiny from lawmakers, academics and economists. The stock market's collapse has revealed the vulnerability of America's retirement system. Increasingly, employers have abandoned traditional pensions, forcing workers into 401(k)s, which tend to have more exposure to market forces. Many lawmakers also pushed 401(k)s, approving rules in recent years that, for instance, make it easier for employers to automatically enroll their employees in such plans.
David said 401(k)s are still a good retirement savings vehicle but should not be the only one that an employee relies on.
"They were designed to be one of several savings vehicles," he said. "To look at 401(k)s as the only form of retirement savings is not appropriate."
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