Data & Research November 11, 2010

Fidelity Says Staying the Course Pays Off

Pre-retiree participants who continuously held a 401(k) plan with Fidelity Investments for the past 10 years more than doubled their account balances, according to a Fidelity news release.
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The average account balance for these pre-retirees, ages 55 years or older, rose to $211,300 by the end of the third quarter of this year from $96,000 ten years ago. Pre-retirees with a contribution rate at or above 8% this year showed average balances increasing more than 130% over the past 10 years to $291,700, from $125,600.

“The past decade was certainly not a lost decade for participants who remained committed to saving even through all of the market’s ups and downs,” said James M. MacDonald, president, Workplace Investing, Fidelity Investments, in the news release. “A disciplined, systematic savings approach in a diversified portfolio has been the key to building a sizable nest egg for many pre-retirees during one of the most volatile decades in history.”

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Participants of all ages learned valuable lessons during the recent economic crisis and put those lessons to work during the third quarter of 2010, MacDonald said. For the seventh straight quarter, participants deferred, on average, 8.2% of earnings to their 401(k)s.

More participants increased their deferral rates (4.2%) than decreased (3.1%), a pattern of positive savings occurring for six consecutive quarters. Fewer participants allocated 100% of their assets to equities at the end of the third quarter (13.1%) as compared to the same period a year ago (14.5%). Strong market returns combined with solid savings rates resulted in average 401(k) account balances increasing 9.4% to $67,600 by the end the quarter, up from $61,800 at the end of the second quarter.

Many retirement investors have benefited by diversifying their asset allocation for more balanced portfolios over the past decade. At the end of the third quarter of 2010, the average equity allocation for all participants was 65.4%, down 13% from the end of the third quarter of 2000. Pre-retirees shifted even further toward conservative investments, seen as a prudent strategy as they transitioned to retirement age. Over the past five years, their average portion of total equity contribution allocations reduced to 57.6% at the end of the third quarter 2010, from 63.6% at the end of the third quarter 2005.

By the end of 2010, Fidelity will have offered defined contribution participants more than 13,000 live onsite workshops at employer locations, plus nearly another 1,400 via the Web and almost 1,000 through on-demand services. During the third quarter of 2010 alone, more than half of all active participants logged onto NetBenefits, Fidelity’s employee benefits portal, or contacted a Fidelity representative to take an account action or seek guidance. Of these participants, the largest population turning to Fidelity for guidance was pre-retirees, the company said.

Compliance November 11, 2010

Court Forgives Use of Prior Year Stock Valuation for Plan Distributions

The U.S. District Court for the Southern District of New York ruled in favor of an employer sued for its use of a year-old stock valuation when making distributions to participants.
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U.S. District Judge Shira A. Scheindlin found the plan not only condoned, but explicitly required, defendants’ use of the June 30, 2008, valuation to establish the Fair Market Value (FMV) of Company Stock at the time of the distribution in 2009. Scheindlin rejected Paul McCabe’s argument that the plan’s rules for determining fair market value should have been overridden given the “extraordinary” circumstance that the company was going under and the plan fiduciaries decided to end participants’ interest in the plan.  

The court said the distinction between ordinary and extraordinary circumstances does not appear anywhere in the plan or the summary plan description (SPD).

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In addition, Scheindlin found that reliance on the June 30, 2008, valuation seemed to best serve participant interests. “Based on the cost in previous years, a new valuation would run at least twenty thousand dollars, practically a third of the Company’s total value at the time,” Scheindlin wrote. In deciding not to do an interim FMV valuation, the company followed the Employee Retirement Income Security Act’s (ERISA) charge to “defray reasonable expenses of administration” as part of the duty of loyalty.  

According to the opinion, McCabe  alleged that Capital Mercury Apparel and certain officers breached their fiduciary duty by applying a year-old valuation of the company that did not reflect its fair market value at the time of the distribution to participants with under $1,000.  

The plan dictates that any cash distribution to participants is “based upon the Fair Market Value of Company Stock as of the Allocation Date immediately preceding the date of distribution.” Specifically, participants are informed that the value of the vested interests in their accounts is determined by the Fair Market Value “as of the June 30 coinciding with or immediately preceding the date of distribution.”  

The valuations indicated a steady increase in stock price until June 30, 2001, when a series of poor managerial business decisions and declining industry performance reversed the Company’s fortunes. As a consequence of “the Company’s likely liquidation, as well as its poor historical performance and uncertainty of positive future performance,” an appraiser used by the company determined that the market and income approach he typically used was not “likely to result in a meaningful indication of value,” and switched to the “adjusted book value approach” (“ABVA”) for the June 30,2008.   

The case is McCabe v. Capital Mercury Apparel, S.D.N.Y., No. 09 Civ. 8617 (SAS).

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