Earlier this month we learned that Americans continue to have a highly-favorable opinion of their tax-advantaged 401(k) plans, in part because consistent participation can lead to substantial growth in one’s retirement nest egg. This is supported by an updated Fidelity Investments analysis which found that the average account balance for workers who have been in their company’s 401(k) plan for fifteen consecutive years ended 2020 at $479,100. That represents a greater than 600 percent increase since 2005 for this group of participants, and younger workers have perhaps benefited the most from the multi-year run-up in retirement assets.
For example, Millennials who continuously invested in their employer’s defined contribution (DC) plan for the past 15 years have already amassed an average 401(k) balance of $251,100, an all-time high for this data series. With such a large nest egg these young adults are well positioned to keep growing their assets and in turn be able to better handle the retirement funding challenges of the future. Although the highly resilient stock market (which has weathered the Global Financial Crisis, Q1 2020’s volatility shock, and countless other corrections) has obviously supported the rapid growth in retirement account balances during the past fifteen years, the strong economy has arguably played a much bigger role in helping Americans prepare for a comfortable and financially secure retirement. Obviously the pandemic provided a major setback, as evidenced by the average participation rate in DC plans ticking lower for the first time in 2020, but the recovery is already underway and should gain momentum as the economy is able to fully reopen. This will lead to rising incomes and a greater number of jobs that provide access to 401(k) plans with accompanying matching contributions, and workers already appear more than willing to take advantage of such a favorable environment.
The average total savings rate (employee contributions + company match) among all 401(k) participants in Fidelity’s sample, for instance, held at a record 13.5 percent in 2020. That is an encouraging sign that the vast majority of participants and employers did not materially alter their contribution rates even in the face of such unprecedented economic uncertainty. Of course some firms did suspend their contribution match, while others might have abandoned earlier plans to introduce such a feature. Fortunately these and other 401(k)-related disruptions appear to have largely been a transitory phenomenon, and when considered alongside the various COVID relief payments from the government it can help explain why 2020 also saw a significant year-over-year increase in the average IRA balance. Regardless of what kind of account the money ultimately wound up in, though, it was encouraging to see the positive saving behavior demonstrated by many Americans last year. Fidelity’s Kevin Barry added that “Taking a long-term approach to retirement savings, which includes consistent savings efforts and managing asset allocation, can help investors weather the economy’s ups and downs.” The report also recommended a few things for employees to keep in mind the next time the economy experiences a downturn to help them stay on track for a comfortable and financially secure retirement:
- Making changes to your contributions
- If you have to lower your contribution, try to contribute enough to get any available company match—don’t leave free money on the table.
- Revisit your saving contributions regularly and consider adjustments as we get through these uncertain times—even 1% more can make a big difference over time.
- Accessing money from your plan in a financial emergency
- Options vary depending on your employer’s plan rules, including hardship withdrawals and loans, so be sure to understand what’s available based on your personal situation.
- Note that CARES Act distribution provisions are no longer available in 2021.
- Making changes to your investments
- To help you feel more confident about your investments, it’s important to understand how your retirement account is invested. Factors to consider include the numbers of years until you retire, your financial situation, and how much risk you are willing to take on.
- Decide if you want to manage your own investments or get help. If you don’t want to do it alone, consider a target date fund or managed account.
Sources: Fidelity Investments