Fidelity’s 401(k) Data Show Steady Savings Pattern by Majority, but Loans and Hardship Withdrawals on the Rise

BOSTON--(BUSINESS WIRE)--Fidelity Investments, the nation’s No. 1 provider of workplace retirement savings plans¹, today released its quarterly data² on the state of the 401(k) that show positive, steady savings behavior by the majority of participants. However, it also cited an increase in the use of loans and hardship withdrawals by participants.

“The majority of participants continue to make saving through their workplace plans a priority”

“The majority of participants continue to make saving through their workplace plans a priority,” said James M. MacDonald, president, Workplace Investing, Fidelity Investments. “However, the current economy has forced some workers to borrow from their 401(k) accounts in order to pay for critical living expenses, ultimately jeopardizing their future retirement.”

The average 401(k) account balance as of the end of the second quarter was $61,800, up 15 percent from the same time last year, but down from the end of the first quarter of 2010. The average deferral rate, which refers to the percentage of a participant’s salary saved, held steady during the quarter at about 8 percent with one-in-three (32%) participants deferring at 10 percent or higher. Similar to the first quarter, more participants increased their deferrals (5.3%) than decreased (2.9%) in the second quarter.

Loans and Hardship Withdrawal Activity Rising Especially Among Middle Aged

While the majority of 401(k) participants continued to save during the quarter, the percentage of participants either initiating a loan or a hardship withdrawal increased. Loans initiated over the past 12 months grew to 11 percent of total active participants from about nine percent one year prior. The portion of participants with loans outstanding also increased two full percentage points in the second quarter to 22 percent. The average initial loan amount as of the end of the second quarter was $8,650 with an average loan duration of three and half years.

“We recognize that for some, taking a loan or a hardship withdrawal from their 401(k) may be their only option because it’s their only form of savings,” said MacDonald. “However, we want to make sure that before workers tap their retirement accounts prematurely, they are fully educated about both the penalty that may be incurred and the long-term implications for their retirement.”

During the second quarter of this year, 62,000 participants initiated a hardship withdrawal, as compared to 45,000 participants who initiated one during the prior quarter. As of the second quarter, 2.2 percent of Fidelity’s active participants took a hardship withdrawal, up from 2.0 percent one year prior. Additionally, 45 percent of participants who took hardship withdrawals one year prior also took a hardship withdrawal in the 12 month period ending in the second quarter of this year. Plan sponsors report that the top reasons why participants are taking hardship withdrawals are to prevent foreclosure or eviction, pay for college, and the purchase of a primary residence.

Fidelity has found that the average age of those taking a loan or hardship withdrawal is between 35 and 55 years old – a worker’s peak earning years – when individuals often have to deal with multiple, competing, financial challenges. Distributions from a 401(k) or 403(b) are taxed as ordinary income, plus if you are under age 59½ you may be subject to a 10 percent early withdrawal penalty.

About Fidelity Investments

Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of over $3.1 trillion, including managed assets of $1.4 trillion, as of June 30, 2010. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.

Keep in mind that investing involves risk. The investment’s value will fluctuate over time and an investor may gain or lose money.

Fidelity Brokerage Services LLC, Member NYSE, SIPC
900 Salem Street,
Smithfield, RI 02917

559111.1.0

¹ Based on 2008-2009 data from Cerulli, PlanSponsor.com and Fidelity Market Insights Group.

² Data based on our analysis of nearly 17,000 corporate DC plans and 11 million participants as of June 30, 2010.