As the stock market sharply declined towards the end of 2018, Fidelity Investments reported a similar dip in retirement account balances for customers. 401(k)s, individual retirement accounts, and 403(b)s were all affected, experiencing double-digit drops during the start of the bear market. And while it would be easy for investors to get upset about the downtrend in retirement funds, it appears that there’s still a silver lining to be had upon further examination of the situation.
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In Q4 2018, the average 401(k) balance was $95,600, down more than $10,000 from a record $106,500 all-time-high that saw American workers enjoying retirement planning bliss. Experts initially feared this decrease came from panicked investors who were prematurely withdrawing retirement savings, scared off by a see-sawing bear market.
But now, after having some added perspective in Q1 2019, analysts are placing much of the blame for the 10% 401(k) drop on market volatility alone – not investors who were trying to hide from it.
Individual retirement accounts fell as well, down 11% from last quarter to $98,400, and even 403(b) plans (offered to public school and tax-exempt organization employees) experienced some losses, declining 10%.
Fidelity Investments, who initially saw shrinking retirement accounts as a sign of future economic uncertainty, are now attributing the contraction to other factors – one of them being the young Americans flooding the workforce, as evidenced by high employment statistics.
Still, seeing retirement balances decline is nothing to celebrate, even if institutions can explain away much of the drop.
Just a year ago, when retirement accounts were on an absolute tear, new 401(k) millionaires were being crowned with each passing day. It got to the point where roughly 5% of the population (or 1 out of 20 people) had million-dollar retirement plans.
Since then, that number has dropped.
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But the change didn’t come as a result of any finagling by investors themselves. Fidelity Investments reported that only 5.6% of their customers ended up actually making any changes to their investments during Q4 2018, a quarter that saw the S&P 500 shed almost 14% in market cap. The inaction from investors in this case (or just the decision not to exit the market) may have ended up saving equities from an even bigger drop.
“We are seeing less panic set in when there are downturns in the market,” remarked Meghan Murphy, vice president of Fidelity Investments.
Even better? According to Fidelity, 99% of workers contributed to their 401(k) plans in the fourth quarter of last year, marking the highest quarterly contribution percentage in a whopping 8 years.
And so it seems that in a market that’s largely motivated by fear and greed (and knee-jerk reactions to the Federal Reserve’s press conferences), retirement-seeking investors have acted surprisingly mature.
Perhaps it’s because 401(k) funds seem hopelessly out of reach for younger investors. After all, why should you get upset about cash you won’t be able to touch for several decades?
Or, it could be the IRS’s lovely 10% penalty imposed on early withdrawals. If the market’s already down, another 10% drop on your 401(k) distribution would just add insult to injury.
Either way, as equities continue to stretch out the post-Christmas rally in the midst of a bear market (yes, we’re still in a bear market), investors are standing fast when it comes to their retirement, even if they’re down from the 2018 highs.
Could this be a positive sign for the future? Possibly, but we’ll know for certain when the market eventually corrects, something that looks like a foregone conclusion after weeks of rampant buying. If retirement accounts don’t take a major hit when the bears resume their selling, then (and only then) it might be time to celebrate.