Roughly $8.9 trillion are held in 401(k)s and other defined contribution (DC) plans in America, according to the latest quarterly update from the Investment Company Institute (ICI). That represents a significant rebound from earlier this year when the lockdowns and other efforts to stem the spread of the coronavirus were in full effect. In fact, total retirement assets are already just fractionally below the all-time high hit in 2019, and based on the recent run-up in the stock market it is likely that even this level will be eclipsed when the Q4 update is released (save a December correction). The ICI report also revealed that the vast majority of DC participants in America continued to save using their workplace-provided retirement plans during the third quarter of 2020. Specifically, only 1.2 percent of participants took a hardship withdrawal in Q3, matching the record low, and just 2.2 percent stopped making contributions to their DC plans last quarter, less than half of what was seen during the “Great Recession.” An updated analysis by Fidelity Investments similarly found that the average account balance for workers who have been utilizing their company’s 401(k) plan for fifteen consecutive years ended the third quarter of 2020 at $433,100, a 366 percent increase in just the past decade.
Such figures highlight how confidence in the long-term resiliency of the stock market and a steady stream of savings have together helped many 401(k) participants not only survive but even thrive in periods of significant financial and economic uncertainty. The longitudinal report also adds to the evidence that although investment gains can generate rapid growth in retirement account balances, a strong economy perhaps plays a much bigger role in helping Americans achieve a comfortable and financially secure lifestyle in old age. Indeed, as the economy continues to recover from the pandemic-related shock, some industries are already seeing rebounding incomes and a greater availability of jobs that provide access to 401(k) plans and accompanying matching contributions. Encouragingly workers with access to such benefits appear more than willing to take advantage of them because the total savings rate (employee contributions + company match) among all 401(k) participants in Fidelity’s sample climbed to an average of 13.5 percent in Q3, an all-time high. Two out of every three participants who raised their deferral rate last quarter did so because their employer had implemented an automatic escalation feature, another sign of how effective such initiatives can be. Even better, the number of individuals saving in both an IRA and a 401(k) is on the rise again and already up 12.5 percent compared to this same period last year. Average combined balances have also experienced a sharp rebound (up 6 percent vs. Q3 2019), and Millennial savers have seen more than double this growth lately. Many retirement savers have of course not fared as well this year, and for these individuals here is some of the advice Fidelity suggests following to help better navigate such periods of economic and market tumult in the future and in turn stay on track to achieve retirement goals:
- 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.
- 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: ICI, Fidelity Investments