A new report shows that 401(k) accounts have reached record levels with the overall average balance reaching $80,000 at the end of the first quarter. The Fidelity Investments quarterly analysis explains the current record balances represent 75% growth from the first quarter of 2009 when average accounts dropped to $46,200.

“What we found really interesting, though, is that two thirds of the growth in account balances is due to the market and one third to contributions,” explains Jeanne Thompson, Vice-President of Market Insights with Fidelity Investments. She adds that this market to contribution ratio varies over time and it is the asset allocation along with markets that can really make the difference within account  balances.

From an adviser perspective, says Thompson, plan participants and employers should be educated on the ideas of risk tolerance and time horizons – both in up and down markets. “For advisers, it’s really making sure people are checking their accounts on an annual basis to make sure something in their lives has changed that would make them want to take more risk or less risk.” For those that can’t stomach the markets and are not comfortable making these decisions, upon yearly assessments, advisers also have the option of looking at target date and lifecycle funds.

Another interesting element lies within the idea that while contribution rates don’t change that much with market fluctuations, allocations and fund movement does – further highlighting an area for advisors to monitor as they talk to plan sponsors and participants.

And not only those that have been in the market a short time have seen their assets grow to record levels. So-called “pre-retirees” of 55 years and older, and who had an employment history of 10 years or more with their current employer, saw their accounts grow to an average $255,000. This is significant in that they have been able to weather the economic crisis by maintaining a diversified asset allocation.

“Even at age 55, many of them have 10 plus years before retirement and even then may live until their 90s, and it is therefore important to always review asset allocation,” she says. Some at age 50 are playing catch-up with their allocations, adds Thomspon. Again, advisers can look not only at the younger participants but those that are nearing retirement who still have investment choices to make.

Overall, the message to participants needs to cover three areas, explains Thompson. They include participation and the need to make consistent deferrals to the plan, contributions and possibly the idea of increasing those contributions each year either manually or through auto-enrollment, and finally ensuring the right asset allocation either based on time horizons or risk tolerance or both, is achieved.

Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community. joel@kranccomm.com.

 

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