Lessons from the recession about savings

Michelle Hicks

Some exciting news came out from Fidelity Investments in late May – contributions to 401(k) plans were up in the first quarter of 2010. As reported in the San Jose Mercury News, Fidelity says the average contribution rate is 8.2 percent. That’s still significantly below the 10 to 12 percent recommended by many financial advisers, but it is well above the 5 percent Fidelity reported in the last quarter of 2009.

It appears employee investors are starting to regain their confidence in the markets, since market volatility exploded in the fall of 2008. In a statement regarding the first quarter highlights, Fidelity also reported that “over the past year, average account balances rose 41 percent to $66,900 by the end of first quarter of 2010 and personal rates of return (PRR) were a positive 42 percent.”

This positive behavior could reverse itself, however, if the recovery doesn’t hold. Market troubles in Europe and other parts of the world threaten more economic uncertainty. So, what can employers learn from the recent recession to help their employees keep their commitment to retirement savings?

The first and most important thing is that retirement saving is very personal. Each individual has to understand for himself why saving is important. One of the most effective tools to help in that understanding is a personalized investment calculator. A study by the Employee Benefit Research Institute found retirement saving calculators truly impact saving behavior. Of the workers who attempted to perform a retirement savings calculation in an EBRI study, 43 percent made changes to their retirement planning as a result and 57 percent started saving more for retirement.

When volatility causes employees to panic about the security of their savings, they need education reinforcements about market cycles and long-term instead of short-term outcomes. For example, reminding employees about concepts such as dollar-cost averaging can provide the assurance they need to keep saving. Dollar-cost averaging being the concept of contributing a set amount in each of their plan investments every pay period, regardless of how the market is doing, so their money buys more units of each investment option when prices are low, and fewer when prices are high. Financial experts say that in the end, investors generally pay a lower average price per share than if they invested all their money at once.

Of course, it doesn’t ensure a profit or guarantee against loss in declining markets, but it can be an effective long-term strategy for retirement planning. And, there is data to support that claim. For example, if you made a $10,000 investment in 1968, and kept your money invested earning returns equal to the performance of the S&P 500, that investment would have been worth more than $346,000 by December 2008.

Another impact on retirement plan balances is the amounts of loans employees take from their plans. In order to help employees avoid sacrificing those long-term investments, it is important that employers truly educate their workforce about the consequences of loans. According the EBRI, 18 percent of plan participants had loans against their accounts at the end of 2008. The average balance being more than $7,100.

Asset allocation is another important concept employers can help their employees understand better. When it comes to asset allocation, most employees set it and forget it. That truly backfired on many people nearing retirement age when markets crashed in 2008. Had those same employees rebalanced their accounts into less volatile investments than they selected when they were younger, they still would have experienced losses, but probably not at the same levels.

Employees are turning to their employers now more than ever for the information they need to understand their 401(k) plans and how to leverage that saving tool. Using the lessons of the last recession as a guide, employers will find there is a lot of opportunity to meet this expectation and demonstrate your concern for their financial health. It’s a powerful way to build employee loyalty and commitment.

Michelle Hicks is a communications consultant with Buck Consultants. Contact her at michelle.hicks@buckconsultants.com.

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