Workers stashed money away in their 401(k) retirement plans at a faster clip last year but didn't get an immediate reward for their savings strategy. Fidelity Investments, the nation's biggest 401(k) administrator, says the average account balance was essentially unchanged in 2011, compared with 2010.
The year-end average for participants in Fidelity Investments plans was $69,100, down $300 from 2010, the company said on Thursday. The average slipped despite a slight increase in employee contributions. The 11.6 million participants in Fidelity's plans set aside an average $5,750 through paycheck deductions, up from $5,680 a year earlier. That's more than 8 percent of their annual pay, on average.
The amount that employers paid in matching contributions also rose slightly, averaging $3,270 last year. The increase came as more companies restored matches that had been reduced or suspended during the recession.
But the balance boost that workers received from higher contributions was offset by factors including investment performance, and fees paid to manage the money and administer plans. Those fees can be a significant drain on returns, and are one key reason why changes in account balances don't match market performance.
Stocks were volatile in 2011. They rose in the first half of the year, then tumbled over the summer only to rally at year-end. The Standard & Poor's 500 index finished virtually unchanged, but rose 2.1 percent factoring in dividends. Many 401(k) accountholders invest in foreign as well as domestic stocks, and several overseas indexes tumbled. Bond investments in plan accounts helped offset those losses, as the Barclays Capital U.S. Aggregate Bond index rose 7.8 percent.
The average 401(k) balance tracked the year's bumpy market returns. At midyear, it reached $72,700, the highest since Fidelity began tracking balances in 1998. The average dropped 12 percent over the next three months, amid growing worries about the global economy and the European debt crisis. Those fears eased late in the year, sparking stocks to climb and boost the average account 8 percent in the fourth quarter.
Typically, about two-thirds of annual increases in 401(k) account balances are the result of workers' added contributions and company matches. It's only the final third that's the result of investment returns, said Beth McHugh, vice president of market insights at Boston-based Fidelity.
One reason that account balances didn't rise last year is recent strong growth in the number of new plan participants, McHugh says. Many new enrollees are young workers who haven't been saving long enough to build up substantial accounts. Consequently, their low balances reduce the overall average account size.
However, balances have risen all but two quarters since the market meltdown, which reduced the average to $46,200. Since then, the number of workers increasing their contributions has consistently surpassed the number cutting them.
Investment earnings and contributions can grow tax-free in employer-sponsored 401(k) accounts, a key reason why they're popular ways to save for retirement.
Yet it's been a tough battle in recent years. Workers who have stayed in the market haven't been able to rely on investment gains to build up savings. That's because stocks are nearly 15 percent below their historic peak in October 2007. Instead, workers have had to rely on contributions from themselves and their employers.
Nevertheless, Fidelity's latest numbers demonstrate the value of a making saving a habit. Workers in Fidelity 401(k) plans who routinely set aside money from their paychecks with the same employer for at least 10 years had amassed an average $179,100 by the end of 2011. That's nearly two-and-a-half times greater than the overall average for Fidelity's 401(k) participants _ including workers who haven't been saving for a long time or discontinued contributions because of economic hardship or a switch to a new employer.
"It's a very important reminder that participants will benefit through a continuous commitment to savings," McHugh said.