Why Rising 401(k) Balances May Not be Enough

By

Published November 19, 2012

| MoneyRates.com

In a landscape often filled with grim retirement news, Fidelity Investments reported this week that the average balance of the 401(k) accounts it manages has hit a 12-year high.

But while the increase in balance amounts is one positive development, there are still reasons to doubt that Americans are saving enough for retirement. Several recent studies have suggested that savings rates need to rise sharply before most Americans can expect to comfortably exit the workforce at 65.

Employer contributions rise nearly 20 percent in five years

Fidelity analyzed data from 12 million 401(k) accounts from across more than 20,000 corporate defined contribution plans to determine that not only are account balances on the rise, but both employee and employer contributions have increased as well.

As of the end of the third quarter of 2012, Fidelity 401(k) accounts had an average balance of $75,900. That number is up from $64,300 a year ago and represents the highest account balance recorded by the company since it began tracking these amounts 12 years ago.

While balances may be growing in part to changes in the market, increased employee and employer contributions have also likely helped. Employees now contribute an average of $5,900 annually to their accounts, up 7.3 percent from 2007.

Meanwhile, employers are pitching in almost 20 percent more than they did five years ago. The average annual employer contribution is now $3,420.

But is it enough?

Although the increase in 401(k) contributions is good news, it begs the question of whether it makes much difference to the state of retirement savings. The Fidelity analysis does not indicate the average age of account holders, but a balance of $75,000 is well below what financial advisers typically recommend for people nearing retirement.

With the future solvency of Social Security remaining a question mark, today's younger workers may be well advised to carefully calculate their financial needs for retirement. Unfortunately, for many middle-income workers, saving more appears to either not be a priority or a possibility.

A recent study from LIMRA, a research and consulting firm in the financial services industry, found 65 percent of workers earning between $40,000 and $99,999 annually are saving less than 5 percent of their income for retirement. In addition, 22 percent say they are saving nothing.

"These results, while not surprising, are very troubling," said Matthew Drinkwater, associate managing director of LIMRA's retirement research, in a written statement. "Less than 30 percent of American workers have a traditional defined benefit retirement plan that could help them pay for their expenses in retirement, so the responsibility for providing the financial resources for retirement lies squarely on the individual."

While the Fidelity analysis shows a promising trend in increasing 401(k) balances, the LIMRA study and other similar reports indicate workers may have a long way to go until they can be confident of their ability to retire with financial security.

The original article can be found at Money-Rates.com:
Why rising 401(k) balances may not be enough

URL

http://www.foxbusiness.com/personal-finance/2012/11/19/why-rising-401k-balances-may-not-be-enough/