Fall 2010
Pre-Retirees: Regaining Ground and Improving
Retirement Readiness
A Building Futures Report: Q3 2010
Table of Contents
Facing New Realities
1
Regaining Some Lost Ground
2
Pre-Retirees Are Saving Steadily
3
Equity Allocation Diversifies Over Time
4
Exchanges Increase with Age
5
Caution Lingers Following “Flash Crash”
6
Staying Power Is Key to a More Successful Outcome
7
Moving Forward
8
Pre-Retiree Checklist
9
Facing New Realities
More Americans now view their workplace plan as a cornerstone of retirement, and
“pre-retirees” (those age 55 and above) must look for ways to maximize every savings
opportunity or risk running short of their income needs in retirement. Increasingly,
employees of all ages are beginning to realize they will need to work beyond the
typical retirement age of 65.
In its 2010 Retirement Confidence Survey, EBRI found that 33% of Americans now plan
to continue working past the traditional retirement age of 65, up from 25% five years
ago.1 Fewer have pensions and most understand that Social Security may not provide
them with enough income to support the retirement lifestyle they envision. It’s critical
that those in the “final stretch” of their working years make meaningful progress with
their retirement savings.
Fortunately, many heeded the advice from their employers about the importance of saving for
retirement and are better positioned to retire as planned. In fact, recent findings seem to indicate
that those who have been persistent savers are showing signs of success. In light of the new economy,
however, a large number of pre-retirees are faced with recalibrating their retirement strategies.
This Building Futures brief is based on our analysis of nearly 17,000 corporate defined contribution
plans and 11 million participants as of September 30, 2010. It highlights account balance growth of
290,000 pre-retirees who were continuously employed by their DC plan sponsor and had balances in
their DC plan for 10 or more years. The brief suggests key considerations plan sponsors can take to
augment their current efforts and provide support to all participants seeking to improve their chances
of retirement success.
Key Findings:
• Average account balances for pre-retirees continue to improve — even more so for those
continuously employed who have maintained a balance in their plan for 10 or more years.
• Contribution rates rise strongly with age.
• Pre-retiree participants are increasingly cautious with how they allocate their contributions.
• Exchanges over the past 12 months have been into more conservative options — particularly since
the May 6 “Flash Crash.”
• Consistent saving and ongoing education are keys to a more successful outcome.
© 2010 FMR LLC. All rights reserved.
1
Regaining Some Lost Ground
The average account balance for pre-retirees is up 11% from Q3 2009, and up 14% from Q3 2008. While
the challenges of the lingering recession and market returns impacted the average account balance for
pre-retirees during the past several years, their account balances have regained some lost ground. This
can be attributed to both continued contributions and market gains. These overall average account
balances represent a constantly changing mix of participants, due to newly hired participants being
added in and retirees and job changers being taken out (no longer actively employed by the plan
sponsor). An alternative approach to looking at true changes in average account balances is to look at
an unchanging set of participants.
For the set of pre-retirees who were both actively employed by their plan sponsor and had balances
in their plan for each of the last 10 years, average balances more than doubled, from $96,000 to
$211,300. This 120% growth over 10 years corresponds to a nominal compound annual growth rate of
8.2%. When adjusted for inflation, this growth corresponds to a 5.9% real compound annual growth
rate (8.2% nominal rate – 2.3% inflation = 5.9% real growth rate). “Staying the course” by continuing to
make contributions and remaining invested in diversified options
The average account balance of
pre-retirees is up 11% from 2009,
and up 14% from 2008.
helped a number of pre-retirees grow their accounts, with the
average account balance reaching a 10-year high of $211,300 as
of the end of the third quarter (Exhibit 1).
Exhibit 1: Average Account Balances of Active Participants Age 55+ (10-Year Continuous)
Q3'02
$211,300
$189,500
$180,900
$145,700
$79,300
Q3'01
$121,700
$81,700
$50,000
$96,000
$100,000
$102,100
$150,000
$167,700
$200,000
$206,300
$250,000
$0
Q3'00
Q3’00–Q3’10:
Cumulative % Change:
Compound Annual Growth Rate:
Annualized Inflation:
Q3'03
Q3'04
Q3'05
Q3'06
120%
8.2%
2.3%
Notes: Age was 55+ as of 9/30/2010. Inflation based on CPI for all urban consumers.
Note: Past performance is no guarantee of future results.
2
Q3'07
Q3'08
Q3'09
Q3'10
Pre-Retirees Are Saving Steadily, But
Could Save More
We continue to see the majority of pre-retirees contributing to their workplace retirement plans.
Pre-retirees contribute an average of 10.6% to their plan (excluding employer contributions), compared
to the average contribution rate of 8.2% for all age groups, and deferral rates increase with age
(Exhibit 2).
Exhibit 2: Average Deferral Rate by Age
12
10
9.4%
8
6
5.2%
5.9%
6.8%
7.4%
7.9%
10.3%
10.9%
11.7%
12.0%
8.3%
8.2%
4
2
0%
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
65–69
70+
Overall
Note: Total elective deferral rates shown include employee pretax, post-tax, Roth, and catch-up contributions.
They exclude employer contributions.
While many plans offer catch-up contributions (allowing workers 50 and older the opportunity to make
an additional contribution), only 13% of those participants eligible to make them are taking advantage
of the opportunity. This may be because many participants don’t earn enough to be able to save more
or perhaps because of a general lack of awareness or understanding of the catch-up provision. Whatever
the reason, this is an opportune time for participants to boost their contributions for potential growth.
Exhibit 3: Percentage of Participants Deferring to Catch-Up by Age
18
14.5%
15
12
15.4%
16.2%
13.6%
12.9%
10.5%
9
6
3
0
50–54
55–59
60–64
65–69
70+
Overall
Catch-up participation and
deferral rates increase as
workers age (Exhibit 3) and,
accordingly, those who use
catch-up contributions are
saving at higher rates overall.
The average total employee
deferral rate for catch-up
participants is 22% (pretax,
post-tax, Roth 401(k), and
catch-up), with the catch-up
portion at 8% of the total
contribution.
Note: Figures based on percentage of actively employed participants with catch-up
deferral rates in plans that utilize and report catch-up deferral rates. Data for plans that
do not use a separate catch-up deferral rate are excluded.
© 2010 FMR LLC. All rights reserved.
3
Equity Allocation Diversifies Over Time
Savers — both younger employees and pre-retirees — appear to have recovered some confidence
in their ability to invest, particularly those with balances in employer-sponsored savings plans, as
highlighted in a 2010 Retirement Confidence Survey by EBRI.1
Pre-retirees are exercising more caution with their asset allocations than they have in the past. For
example, a look at the contribution allocation to equities for those participants who are 50–54 reveals
a 13% drop from 10 years ago (Exhibit 4). Overall, participants’ contribution allocations have become
more conservative over the past 10 years.
Exhibit 4: Percentage of Contribution Dollars Invested in Equities by Age
100%
83%
75%
80%
87%
79%
87%
78%
86%
77%
83%
76%
81%
72%
79%
76%
70%
63%
66%
50%
56%
60%
55%
51%
43%
25%
0%
20–24
25–29
30–34
Equity 9/30/00
35–39
40–44
45–49
50–54
55–59
60–64
65–69
Equity 9/30/10
Note: Data are for the three months ending on the dates shown. Equities consist of domestic
equities, international equities, company stock (employer securities), and the equity portion of
blended investment options.
4
70+
Exchanges Increase with Age
Despite lingering market volatility, only 10.5% of overall participants made one or more portfolio
exchanges during the 12 months ending Q3 2010, down from 12.6% in the same period last year.
The majority of participants are staying the course, even as they endure a sluggish economy.
The amount of trading increases as participants’ balances grow and they prepare to transition into
retirement. A look at participant behavior by age reveals more participants taking action to rebalance
their account(s)—perhaps to be better prepared for income needs in retirement—as they age. For
example, 14.5% of pre-retirees age 55–59 made exchanges, compared to only 4% of individuals
age 20–24 (Exhibit 5).
Exhibit 5: Percentage of Participants Making an Exchange by Age
15
13.4%
12
14.5%
13.1%
11.3%
9
8.3%
9.3%
10.5%
10.0%
10.0%
6.6%
6
5.1%
4.0%
3
0
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
65–69
70+
Overall
Note: Data represent the 12 months ending 9/30/2010.
© 2010 FMR LLC. All rights reserved.
5
Caution Lingers Following “Flash Crash”
Overall exchanges by individuals 55 and over remain fairly modest, and over the past 12 months the
majority did not make any exchanges. Of the 13% that did make an exchange, many have directed
their allocation into conservative options such as fixed-income and stable value investments (Exhibit 6).
This movement to fixed income peaked after the “flash crash” on May 6, 2010, when the stock market
dropped 600 points, only to recover in a matter of minutes. Prior to this date, the flow between equities
and fixed income was at or near normal levels, yet, since this event, movement into equities has been
extremely small.
This flash crash anomaly appears to have made a lasting
impression on pre-retirees. Since May 6, 2010, net exchanges
Exchanges by individuals 55 and
over remains fairly modest, with
most exchanging from equities
into conservative options such
as fixed-income and stable value
investments.
from equities into fixed-income investments for this demographic
have peaked. It will be important to monitor participant asset
and contribution allocations to ensure that they do not shift
inappropriately for their time horizon, which could result in an
increased risk of a potential shortfall in retirement.
Exhibit 6: Net Exchanges by Asset Class by Age
12 Months Ending 9/30/2010
$100.0
$80.0
Inflows
$60.0
$40.0
$20.0
$0
$(20.0)
Outflows
$(40.0)
$(60.0)
$(80.0)
$(100.0)
20 - 24
Short Term
25 - 29
Stable Value
30 - 34
Fixed Income
35 - 39
Blended
40 - 44
Domestic Equity
45 - 49
International Equity
50 - 54
55 - 59
Company Stock
60 - 64
Specialty
65 - 69
Self Directed Brokerage
70+
Annuity
Note: Data based on all 9/30/2010 Fidelity recordkept corporate DC participants (i.e., actively employed by
their DC plan sponsor, terminated, and those who fell into both categories over the course of the 12-month
period). The “Specialty” asset class includes Real Estate, Natural Resources, Precious Metals, Technology,
Energy, Health Care, and convertible securities. All listed asset categories are mutually exclusive. The values
in the chart have been indexed.
6
Message to All Employees:
Staying Power Is Key to Success
Efforts by plan sponsors — such as plan design enhancements to encourage better participation
and asset allocation strategies, and access to guidance — appear to be having a positive impact on
employee outcomes. A review of participants age 55 and over who were actively employed by their
DC plan sponsor and had a balance throughout a 10-year period (ending 9/30/2010) highlights some
notable and positive trends (Exhibit 7).
• On average, these participants saw balance increases of 120% for the 10-year period.
• Participants who saved at or above the overall average deferral rate of 8% increased their account
balances by 132%.
• Those who utilized the annual increase program increased their balances by 149%.
Account balance growth is a reflection of two major factors: market action and net contributions. In a
period of down markets, contributions play a more prominent role in account balance growth, and in up
markets, the market plays a stronger role.
Deferring at or above 8% and increasing contributions annually has led much of the account balance
growth realized over the past 10 years. In the shadow of extreme market volatility, more than two-thirds
of growth was attributable to ongoing net contributions and less than one-third to the market (as of
9/30/10). Had the market performed differently, these numbers could have been reversed.
Exhibit 7: 10-Year Continuous Actively Employed Age 55+
Participants’ Average Account Balances
$350
160%
149%
132%
120%
115%
$250
Participants
with Hardships
09/30/00
$0 Contributions
09/30/10
100% Lifecycle
Participants
with Loans
Cumulative % change
Participants
utilizing Annual
Increase
Program
$96,000
$200,300
$80,300
$130,800
$60,700
$53,500
$75,900
46%
$51,800
$52,200
$0
$35,300
$50
48%
$121,200
$150
$100
$211,300
$200
10-Year
Continuous
Active
Participants
Overall
$291,700
127%
140%
120%
100%
80%
$125,600
$300
Participants
with > 8%
Deferral Rate
60%
40%
20%
0%
Note: The following categories were based on participants meeting the stated criteria on 9/30/2010: active
participants, annual increase program, deferral rate greater than or equal to 8%, loans, and 100% invested in
lifecycle options. The time period considered for $0 contributions was the 12 months ending 9/30/2010 and
time period considered for hardship withdrawals was any time in the 10-year period. All categories above are
subpopulations of the active 55+ “10-Year Continuous” participants. In other words, they are a subset of the
age 55 and older participants who were actively employed by their plan sponsor and had a plan balance for
the entire 10-year period ending 9/30/2010. Their age as of 9/30/2010 was 55 or older. Past performance is no
guarantee of future results.
© 2010 FMR LLC. All rights reserved.
7
Moving Forward
Plan sponsors are to be commended for supporting both ongoing education and plan enhancements
that are improving participant behavior. While there are a number of positive signs that pre-retirees
are regaining confidence and taking more ownership of their retirement plans, more can be done to
influence positive saving and investing behavior for all employees.
Keeping Up the Efforts
• Plan sponsors should employ the old adage, “Tell ‘em, tell
‘em again, then tell ‘em what you’ve told ‘em.” Encouraging
pre-retirees to save more and emphasizing the importance
of a diversified and balanced portfolio cannot be stressed
often enough.
Plan design features, such as
automatic enrollment and increase
programs, are paying off. Younger
and middle-aged workers are your
pre-retirees of the future, and
these programs are “guardrails”
that are encouraging positive,
lifelong saving habits.
• Plan sponsors who don’t currently offer catch-up contributions should consider doing so, and
those who already offer this feature should make sure they’re promoting it regularly and targeting
participants who are not taking advantage of this benefit.
• Plan design features such as automatic enrollment and annual increase programs are paying
off. Younger and middle-aged workers are the pre-retirees of the future, and these programs
are “guardrails” that are encouraging positive, lifelong saving habits. Share success stories that
illustrate the impact that healthy savings rates, age-appropriate asset allocations, and little to no
loans or withdrawals can have on their long-term retirement goals.
• Guidance is needed at all levels and age groups to help employees get on track, stay on track,
and prepare for retirement.
• Help employees as they transition from saving to withdrawing by providing them with flexible
income strategies and planning tools.
• Plan sponsors have access to data to help them analyze participant behaviors and plan design
implications. Fidelity associates can assist in identifying trends by age, and targeting areas for
improvement, such as asset allocation.
8
Give Pre-Retirees a List of Planning Steps
There is a lot of information and noise out there, and employees may feel confused or overwhelmed,
resulting in inertia. Employers may want to consider offering these six simple steps to help pre-retirees
prioritize what makes the most sense for their situations.
Pre-Retiree Checklist
Consideration
Action Steps
1. Determine if you
are on track for
your retirement
goals
• Evaluate your expenses, both essential (those things you must have) and
discretionary (those things you can do without).
• List all sources of predictable income, including Social Security and pensions.
• See if you are on track for your retirement goals.
2. Consider ways to
boost your savings
• Contribute as much as you can to your 401(k) or IRA.
• If you are age 50 or older, take advantage of catch-up contributions.
• Work longer or consider part-time work in your early retirement years.
• Think about delaying Social Security payments.
• Evaluate your anticipated lifestyle and trim some expenses.
3. Understand key
Social Security
factors
• It could make up a substantial portion of your guaranteed income; when you
start collecting impacts your total benefit amount.
• Know the key factors that could affect your payments.
4. Evaluate your
portfolio and
create a plan
• Consider what your retirement risk tolerance is: conservative or aggressive?
Review the impact on your portfolio depending on your preferred approach.
• Consolidating old 401(k)s into an IRA can make it easier to manage your
overall financial picture.
• Understand the key priorities for a retirement income portfolio.
• Create a detailed retirement income plan.
5. Research health
care options
• Health care expenses in retirement can be unexpected and higher
than planned.
• Consider options such as long-term care insurance and supplemental
health care options.
• Understand the Medicare application process, including timelines and
premiums, which can be impacted by your age and Social Security.
6. Protect your
retirement plans
• Have an emergency fund you can access for unexpected events or costs
during retirement.
• Pay off high-interest debt to reduce your expenses as you enter retirement.
• Regularly conduct a portfolio review.
• Ensure you have updated your beneficiary information, will, and estate plan.
Employees can access this checklist and many resources online by visiting:
http://personal.fidelity.com/planning/retirement/pdf/getting_ready_to_retire_checklist.pdf?ref_ls=gr1011
© 2010 FMR LLC. All rights reserved.
9
To discuss the trends and insights highlighted in this latest brief, or for
help implementing any of the strategies featured, contact your Fidelity
Representative. Or, for more information, visit Fidelity.com/forum.
010 Retirement Confidence Survey, co-sponsored by the nonpartisan Employee Benefit Research Institute (EBRI) and Mathew
2
Greenwald and Associates.
1
Guidance provided by Fidelity is educational in nature, is not individualized, and is not intended to serve as the primary or sole basis
for your investment or tax-planning decisions. For plan sponsor and institutional use only.
Fidelity does not provide legal or tax advice and the information provided above is general in nature and should not be considered
legal or tax advice. Consult with an attorney or tax professional regarding your specific legal or tax situation.
Investment and workplace savings plan products and services offered directly to investors and plan sponsors are provided by
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
565105.1.0
1.920783.100