Market highs reached during the first quarter of 2013 boosted defined contribution (DC) plan balances—e.g., 401(k) and other workplace plans—to near record levels. As of March 31, 2013, the average DC account balance had reached $80,900, while the average balance among participants who have been actively employed with a balance in their DC plan throughout the past 10-year period hit $210,000 for the first time ever.
For many participants, such outcomes must have seemed difficult to imagine during the dramatic market downturn in late 2008. In fact, the financial crisis might have helped many Americans become more focused on their financial lives. A recent Fidelity survey showed that 56% of people who were "scared or confused" during the 2008 market downturn now feel "confident and prepared."1
So how has this market turnaround impacted retirement savings? Who has benefited from it? What can we learn from it? And what should we do next?
The S&P 500 closed at 677 on March 9, 2009, the market bottom, increasing to 1,569 on March 31, 2013.2
Through detailed analysis of more than 12 million DC retirement accounts, Fidelity Investments attempts to answer these and other questions while providing you with steps that can help keep you on track.
Recovery for preretirees.
Many preretirees, particularly those who were age 55 and older, were vulnerable to setbacks during the market decline. And yet, many of them saw their balances recover. For employed preretirees who have invested continuously over the previous 10-year period, average balances over the past five years increased from $169,100 at the end of the first quarter of 2008 to $255,000 on March 31, 2013, a 51% increase. Fifty-seven percent of that increase was due to market action, while the remaining 43% was due to net contributions (participant and employer contributions, less any withdrawals). For this set of 10-year continuous preretirees, the average employee contribution (excluding the employer portion) per contributing participant was $9,630 for the 12 months through the first quarter (Q1) of 2013, up from $8,410 for the 12 months through Q1 2008.
While preretirees overall have recovered well since the financial crisis, younger participants who could afford to have higher equity exposures reaped even larger increases in balances. For 10-year continuous Gen-Y3 participants, the average balance increased 145% between Q1 2008 and Q1 2013. For Gen-X4 participants, this increase was 97%.
Younger participants stand to learn a lot, however, from the market fluctuation of the past five years and how preretirees approached the situation. No one can predict what the market will do in the future, but remaining "in the game," continuing to invest in line with their expected retirement date, having a solid plan in place, and setting goals can help all participants prepare for potential unexpected future market movements.
Timing the market doesn’t pay.
Although it may be tempting to actively alter your investments in an attempt to avoid loss in anticipation of market lows, historical data show that such efforts tend to backfire. The figure below compares average account balance growth among three participant groups: Those who changed their asset allocations to 0% equity in the Q4 of 2008 or Q1 of 2009 and never returned, those who moved to 0% equity but returned to some portion of equities by the end of Q1 2013, and those who maintained an equity allocation throughout the period.
As the figure above shows, the differences in growth are remarkable. The takeaway: Those who stayed the course fared substantially better than those who retreated altogether or tried to time the market. Fortunately, only a very small portion (1%) of Q3 2008 to Q1 2013 continuous participants who had equity holdings as of Q3 2008 got out of them completely and failed to return to them. For this group, however, the impact on account balance growth during the past five years has been significant: As of Q1 2013, their growth was 14.7%, compared with 88.4% for those who stayed the course.
Being in it for the long haul
While the only predictable thing about market behavior is its unpredictability, history has shown repeatedly that continued plan contribution and diversified, age-based asset allocation has delivered better results over time. Below are some guidance tips on how to optimize your retirement savings, based on analysis by Fidelity Investments of the market’s historical performance:
- Diversification. A diversified portfolio with a well-balanced mix of stocks, bonds, and shorter-term investments is likely—over at least a full market cycle—to provide a superior outcome than a portfolio that is biased heavily toward one or two asset classes. Use Fidelity resources such as Portfolio Review and Retirement Quick Check to help you determine whether you’re on track.
- Stability. During turbulent times, a steady course is most often the best one. A reactionary approach, including a focus on short-term market activity and related attempts to time the market, typically leads to poorer outcomes in the long term.
- All-in-one strategy approach. If you are uneasy about investing, consider the approach of age-based target date funds, or consider managed accounts, which may be a good option for participants who are uncertain about investing.
- Guidance. Participants don’t have to go it alone. Professional guidance can help minimize some of the historical behaviors that investors tend to have, not only regarding asset allocation but for retirement planning as a whole. Better retirement decisions are made within the broader context of planning for all life’s goals.
By taking a long-term approach to investing and considering the importance of full retirement plan participation and age-based asset allocation, investors can have a solid plan for retirement. Ultimately, Fidelity believes that the key to success amid market volatility is participation, not panic.