A weak labor market> isn t keeping everyone from saving for retirement.
During the first half of the year, retirement plan provider Fidelity added $22 billion in new assets to its defined contribution plan the largest sum of any six-month period during the last five years even as the unemployment rate stayed firmly above 9%.
The increase in Fidelity s retirement assets is indicative of a broader trend. Employer-based defined contribution retirement plans held $4.2 trillion in assets on March 31, up from $4.1 trillion at the end of 2009, according to industry group Investment Company Institute.
As for 401(k) plans, per se, assets stood at $2.9 trillion on March 31, up from $2.8 trillion at the end of 2009, according to ICI.
Plan participants could benefit from the rise in their in ranks.
If more employees participate in a 401(k) plan, it can result in economies of scale, says Loren Fox, senior analyst at Strategic Insight. The costs of running the plan can be spread out among more accounts, lowering the costs per employee.
Industry watchers say the trend could continue independently of all but the most difficult economic conditions. They point to several factors, including a long-term approach by retirement investors, greater use of auto-enrollment, easier default investments and a continued stream of new products, such as more alternative, absolute-return and flexible-mandate funds.
Taken together, these four factors mean that unless there is a double-dip recession, 401(k) participation rates should continue to hold steady or edge upwards, Fox says.
A rise in automatic enrollments and some growth in automatic increases, in which the employer raises employee contribution rates as salaries rise, helped lift 401(k) participation rates and asset accumulation at Fidelity, a spokesman said. Roughly 18% of its plan sponsors were using auto-enrollment at the end of 2009. In mid-2006, fewer than 2% of Fidelity s sponsors offered auto-enrollment.
The rise of target-date funds has also made 401(k) investing easier for a significant portion of the work force, Fox says.
Lifecycle (or target-date) mutual funds managed $281 billion at the end of the first quarter, compared with $256 billion at the end of 2009, according to data from the ICI. Eighty-four percent of assets in lifecycle mutual funds were held in individual retirement accounts and DC plan accounts. Fidelity says roughly 20% of its plan sponsors were defaulting investors into a lifecycle or target-date fund as of the end of 2009.
Fox says that retirement plan participants maintain a longer-term approach with their accounts compared to other investors with non-retirement vehicles. Many are still putting more of their money into equity funds than bond funds, even as the broader fund industry sees more money flowing into bond funds than into equity funds, he says.
A Vanguard report on its 2009 defined-contribution plans released in July said many participants in 2009 traded minimally in response to market volatility, increased diversification of their assets through automatic investment programs and protected their retirement savings when they left an employer.
Despite the financial maelstrom of the past few years, we re seeing positive signs for many participants in employer-sponsored retirement plans, said Steve Utkus, head of Vanguard s Center for Retirement Research and a co-author of the report. While there continue to be opportunities to improve saving rates and asset allocations, employees covered by these plans are benefiting from improved plan design, such as automatic enrollment and automatic deferral rate increases, as well as target-date funds.
Because the plans play a key role in the retirement schedules of many Americans, it s significant that workers have continued to save despite the market turmoil of the past two years, Sarah Holden, senior director of retirement and investor research for ICI said in a statement. Only 1.1% of plan participants stopped contributing during the first quarter of 2010, down from 2.7% during the first quarter of 2009. Combined with declining rates of withdrawal activity, the data show that workers are sticking with their 401(k)s, she says.