After rocky year for 401(k) plans, Fidelity VP suggests a rebound on the horizon
The COVID-19 pandemic disrupted nearly every aspect of society, including Americans’ investing habits.
More than three-quarters (76%) are now prioritizing long-term gains over short-term, according to data from Boston-based Fidelity Investments. When it comes to retirement benefits, for example, Americans understand the importance of staying the course, continuing to make wise investments regardless of how volatile the stock market may be.
However, that doesn’t mean that short-term needs aren’t important, particularly when it comes to the matter of financial well-being, according to Mike Shamrell, vice president of thought leadership at Fidelity. “That’s where we’re seeing a desire for workplace benefits that can really help improve one’s quality of life in the here and now,” Shamrell told HRD.
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Last November, Fidelity conducted an Employee Value of Benefits online survey that showed some of the top benefits employees want for financial security include long-term goals, such as a retirement plan and guaranteed income, but also short-term needs, like an emergency savings employer contribution, student debt repayment benefits and banking solutions.
“We’ve observed that when people’s short-term needs are met, they save more for retirement,” Shamrell says.
Of course, retirement savings have taken a hit across the board this year due to an extremely volatile market. In the first quarter of 2022, the average 401(k) account balance decreased by 6.9% from Q4 2021, according to Fidelity’s retirement trends data.
There is encouraging news, though. Shamrell says that retirement savers have so far stayed focused on their long-term savings goals and haven’t made knee-jerk reactions to short-term market events. In fact, the total 401(k) savings rate, which reflects a combination of employee and employee 401(k) contributions, reached a record 14% in Q 2022 and is just below Fidelity's suggested savings rate of 15%.
“While the market's performance and the overall economic environment naturally impact account balances in the near term, consistent contributions and having the right asset allocation are just as important for a successful long-term retirement savings strategy,” Shamrell says. “Encouragingly, Fidelity's analysis found that the majority of retirement savers continued to demonstrate positive savings behavior, which will help keep them on track to reach their goals.”
Shamrell advises retirement savers to remember that sharp drops in the market are often quickly followed by corresponding rises. For example, in the first quarter of 2020 (think dawn of the pandemic), the decline was followed by a double digit rebound across retirement account balances, according to Fidelity data.
By the end of the year, retirement balances had reached record highs: the average IRA balance was $128,100, a 9% increase from Q3 2020 and 11% higher than the average balance of $115,400 a year prior. The average 401(k) balance increased to $121,500, an 11% increase from Q3 2020 and up 8% from a year prior. Meanwhile, the average quarterly savings rate for 401(k) accounts reached 9.1%, another record level.
“We are perhaps seeing this again,” Shamrell says, “because during the month of July 2022, the S&P 500 [stock market index] enjoyed its best month since 2020.”
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With open enrollment season rapidly approaching, HR leaders are evaluating which benefits and perks to include in the budget for 2023. Although health care takes top priority, it’s important to consider which financial wellness benefits will most appeal to employees and candidates, especially in such a competitive labor market.
Recommendations about “the” benefits to offer are tricky because it depends on the outcome employers want to drive, Shamrell says. That said, there are some emerging areas where employers can play a key role in aiding their employees.
“With rising inflation being such a concern, American workers are increasingly seeing a need to accumulate short-term savings to better prepare for unexpected financial events,” Shamrell says. “Fidelity continues to see employers bring innovative solutions to market to help employees with their emergency savings and we applaud this trend. In fact, we’re developing solutions such as Goal Booster to help make saving in this area easier. For employees living paycheck-to-paycheck, this will help them feel more financially secure.”
Shamrell says the top benefits that predict improved financial wellness include online financial decision support, an employer HAS (health savings account) contribution, flextime at work and mental health services. Fidelity also finds that the top benefits that increase retention aren’t financially related at all. Instead, they’re related to work-life balance: remote work options, four-day workweek, at least 10 days of PTO (paid time off), etc.
It’s no surprise that retirement plans remain a table stakes benefit. “Employers need to offer it or else it will be a huge drawback,” Shamrell says. “The match matters, too. We find offering closest to a dollar-for-dollar match is linked to higher attraction and retention vs. partial match, regardless of the percent of salary matched.”