There has been a profound change in how participants are using lump-sum distributions that they might receive upon leaving an employer. In the past, many would look at these sometimes large distributions as some sort of windfall. A report from the Employee Benefit Research Institute (EBRI) suggests that this attitude has changed, and for the better. While some still use these distributions for consumption purposes, large numbers are rolling over their distributions to other tax-qualified retirement plans or IRAs. Another large segment is using the distributions toward paying down debt, establishing a business, or applying it to a mortgage or other loan. In 1993, more distributions went toward consumer purchases than to rollovers to qualified plans or IRAs. In 2012, rollovers are way up and consumer spending is way down when it comes to lump sums.
What I think this suggests is that while saving for retirement is a very important goal, it is still part of a more comprehensive financial picture. Understanding this and creating solutions to help individuals who are trying to navigate their own situations will be key to keeping them on the right path toward a more secure retirement. Merely telling a participant to save more for retirement without addressing their other financial circumstances will most likely fall short. While we have seen average account balances continue to rise to record levels and rebound from the economic decline of 2008-2009, the precipitous drop in housing prices at that time has made many individuals and families continue to struggle to bounce back. Nonetheless, the EBRI report is encouraging because it suggests that individuals are doing their best to act responsibly in managing their finances to the best of their respective abilities.
The latest quarterly statistics released by Fidelity show that 401(k) account balances continue to improve. The average now stands at a record-high $84,300 as of September 30, 2013. This represents an 11% increase from the same time frame in 2012. About three-quarters of the growth was due to stock market gains, with the remainder due to employee and employer contributions. Fidelity examined the data from the nearly 21,000 plans it services,comprised of 12.6 million participants.
A few weeks ago, the importance of looking at a continuous group of participants was discussed in this space. The reason for this is that new hires and frequent job changers can skew the averages. Fidelity now echoes that earlier EBRI data. According to Fidelity, participants who have been continuously active in their 401(k) plan for 10 years saw an increase of 19.6% since 9-30-12, with their average balance now at $223,100. Going a step further, pre-retirees age 55+ who have been in their plan for at least ten years have an average balance of $269,500. One other item of note is that one in three participants now use professionally managed investment options, compared with a decade ago when virtually everyone went the do-it-yourself route.
The IRS has released its annual cost-of-living adjustment (COLA) update to retirement plan dollar limits. The elective deferral limit remains at $17,500 for the second year in a row. The catch-up limit remains unchanged since 2009 at $5,500. A detailed chart of current and recent (2012-2014) limits is posted on the IRS website, as is an historical chart dating back to 1993.
Blog Author - Ken Felsher
With over 25 years of writing, editing, and research experience. I enjoy sharing with my readers my love of working with content on a variety of subjects.
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