Workers continued to stash more money in their 401(k) plans in the third quarter, but the stock market's sharp decline only left them further behind in reaching their savings goals.
The average balance in Fidelity Investments' plans dropped nearly 12 percent, falling to $64,300 by the end of September from $72,700 three months earlier, the company said Wednesday.
That setback snapped four consecutive quarters of increases, and even put investors behind where they stood a year ago. Their balances were down 2 percent compared with September of last year, according to Fidelity, the largest workplace savings plan provider, with 11.7 million participants.
Blame the 14 percent decline in the Standard & Poor's 500 index in the third quarter. Investors worried about the European debt crisis and slow economic growth at home, leading to the stock market's worst quarterly loss since the financial crisis in late 2008.
Workers' 401(k)s are typically invested in bonds along with stocks to help reduce volatility. Third-quarter investment gains for bonds helped offset some of the stock market's decline, preventing deeper damage to account balances.
The damage also was eased because workers set aside more from their paychecks to stash in 401(k)s, while employers increased matching contributions.
Fidelity said 84 percent of plan participants contributed over the past 12 months, the highest level in more than two years. Their average contribution was $5,890, setting a record, and up $200 from the same period a year earlier. Employers contributed an average $3,320, an increase of $220.
Over the past 10 years, about two-thirds of annual increases in account balances have been due to workers' added contributions and company matches, with one-third the result of investment returns, said Beth McHugh, Fidelity's vice president of market insights.
There are several reasons why changes in account balances don't match the performance of market indexes. Results depend on the performance of the specific funds an investor holds. Plus, participants in 401(k)s also pay investment fees, which chip away at returns. Investment earnings and contributions can grow tax-free in employer-sponsored 401(k)s, which the government established to encourage saving for retirement.
Balances have risen eight of the 10 quarters since early 2009, when the stock market meltdown reduced the average to $46,200.
Workers who have stayed in the market haven't been able to rely on investment gains to build up 401(k) savings, because stocks remain about 23 percent below their historic peak in October 2007. Instead, they've had to rely on contributions from themselves, and their employers.
Fidelity's 401(k) participants appear to recognize that, McHugh said. Each quarter for the past two and half years, more workers have increased their contributions than cut them.
However, Fidelity reported a recent slight increase in hardship withdrawals from 401(k)s, reflecting the financial stress many workers face as the economic recovery struggles to find momentum. About 2.3 percent took hardship withdrawals over the 12 months ended Sept. 30. In the latest 12-month period, workers making hardship withdrawals removed an average $5,800.
"People are still looking at their retirement accounts as a source of funds," McHugh said. "We recommend people look at it as a last resort."
The major reason? Hardship withdrawals can subject the participants to taxes and possible early withdrawal penalties, if they occur before age 59 1/2. Withdrawals also leave less money in an account to grow as a result of potential market gains and compounding, setting an investor back further in reaching their goals.