Financial Planning, Retirement

The Outperformance Of Multiple Retirement Accounts

9/3/20 8:00 AM

Despite all of the economic disruptions and stock market volatility brought about by the coronavirus earlier this year, the vast majority of 401(k) participants continued to make progress towards achieving a comfortable and secure retirement, according to updated ICI data. Only 2.0 percent of participants, for instance, completely halted their contributions during the first six months of 2020, a clear uptick from last year but still well below what occurred during the “Great Recession.”

Further, just 1.1 percent of participants took a hardship withdrawal in H1, basically unchanged from what was seen in the first half of 2019 and quite encouraging considering that one of the government's policy responses to the pandemic was to make it easier for taxpayers affected by COVID-19 to take penalty-free early withdrawals from their retirement accounts. Withdrawals in general, though, did climb to a new high in H1 2020, but this likely had less to do with the coronavirus and more to do with the growing volume of retiring Baby Boomers. As for borrowing activity, only 15.6 percent of plan participants had related loans outstanding at the end of June, down from the first quarter and one of the lowest readings in the past decade.

Penalty-free, pandemic-related withdrawals might explain some of the reduced reliance on 401(k) loans this year, but another factor has likely been the $1200 relief payment included under the CARES Act that the majority of Americans have used to pay down debt. For such individuals fortunate enough to have actually seen their household balance sheets improve throughout this crisis, one way to build on the positive momentum is to save for retirement in more than one style of account if they were not already doing so. Indeed, updated data from Fidelity Investments showed that the average combined balance for retirement savers utilizing both a 401(k) and an IRA surged by 129 percent since 2008, a higher growth rate in total assets than was achieved by those using only a single type of tax-advantaged plan.

A new Employee Benefit Research Institute study similarly found that employees who maintained both a 401(k) and an IRA throughout the entire multi-year sample period ended with an average amount of combined retirement assets that was about 2.5 times larger than the average 401(k) plan balance, and a median combined balance that was approximately 3.5 times the median 401(k) plan balance. Shifting back to the Fidelity report, the authors added that “people with balances in both a 401(k) plan and an IRA are maximizing their savings opportunities in the pursuit of retirement readiness,” but also acknowledged that “contributing to more than one retirement plan takes budgeting and dedication.” Fortunately contribution rates among these dual savers have so far in 2020 held up rather well.



Sources: ICI, Fidelity Investments, EBRI

Post author: Charles Couch