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Encore
A blog about living in and planning for retirement

Hope for 401(k) Savers?

Can the 401(k) evolve to provide retirement security, or is it a failed experiment? The point is hotly contested.

Two weeks ago, Sen. Tom Harkin (D., Iowa) proposed revamping the U.S. retirement system by replacing the 401(k) with a privately run retirement plan that would provide lifetime income benefits, similar to a pension.

Now, a new report from Fidelity Investments paints an optimistic picture of the 401(k)’s impact. On Aug. 2, Fidelity released an analysis of the 11.9 million 401(k) accounts it administers. Since 2009, the company says, the average employee contribution in the second quarter rose by $150, to $1,660. Employers, for their part, contributed an average of $950 in the second quarter, up $90 since 2009.

“Rising contribution levels from both employees and employers show a strong commitment that both have to workplace savings plans,” James McDonald, president of Workplace Investing for Fidelity, said in a prepared statement.

The firm said new trends among 401(k) plans have particularly helped members of Gen Y, born between 1979 and 1991. Among the 2.2 million Gen Y participants in plans Fidelity administers:

  • 51% have 100% of their money in a target-date fund, versus 30% of investors of all ages.
  • 8.8% contribute to a Roth 401(k), versus 5.8% of all participants.

Why are these trends positive? With a target-date fund, participants have “better diversified portfolios than previous generations, which can have a positive impact over the long term” on their returns, Fidelity says.

As for those who invest in Roth 401(k)s, they must contribute after-tax dollars. But once they retire, they withdraw the funds tax-free. For younger investors, this is typically a good deal. The reason: They are likely to be in a lower tax bracket when they make contributions than they will be in the future, when they make withdrawals.

“The trends we are seeing among our more than 2 million Gen Y participants are particularly exciting,” Mr. McDonald said in announcing the findings.

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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.