Despite rocky market conditions, Americans keep feeding their 401(k) plans, at least according to research from Fidelity Investments. At the same time, more people are taking hardship withdrawals from these plans.
A study released this week based on Fidelity's 16,723 defined contribution (DC) plans found the average pre-tax amount employees contributed to their plans ticked up 1.4% during the first half of 2008, to $3,187, versus the year-earlier period. People who participated in the same company savings plan during both years increased their pre-tax contribution by 7%, to $3,512.
But due to sour market conditions, the average account balance slumped 7.5% at the end of June, to $64,000, from $69,200 a year ago. Among those who stayed in the same plan both years, the average account balance dipped just 1%. The S&P plunged 15% during that time.
Fidelity also reported that 0.60% of employees took hardship withdrawals from defined contribution plans in the June quarter, up 7% from the same period in 2007.
Hardship withdrawals enable plan participants to take out a part of their contributions to a defined contribution plan to meet a pressing financial need. These needs are defined by the Internal Revenue Service, as well as by provisions in each plan. But such withdrawals come at a price: the money is taxed at ordinary income-tax rates and is exposed to an additional 10% tax on pre-tax amounts withdrawn.
But Fidelity stresses that the total number of people taking hardship withdrawals remains a tiny minority of DC plan participants--just 1.6% on an annualized basis through this year's first half.