22 September 2021

401(k) Plan Balances, Contribution Rates Hit Record Highs: Alight

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Another report is out showing record 401k balances at the end of 2020, and some good news on plan participant contribution rates as well.

Through a combination of increased contributions and high investment returns, workers’ retirement accounts bounced back from the early economic turmoil caused by the pandemic to reach historic levels, according to a new report by Alight Solutions.

Alight’s 2021 Universe Benchmarks report revealed that the average defined contribution (DC) plan balance hit an all-time high of $130,330 by the end of 2020. Earlier this week, Bank of America announced its average 401k account balances grew to $81,000 in 2020, and the overall average contribution rate was 6.5%.

Per the Alight report, last year also marked the first time the majority of plan participants (51%) were saving above 6% of their salary. The report shows nearly a third of participants (32%) are saving between 7% and 10%, and nearly a fifth of participants (19%) are saving more than 10%. On average, participants saw more than $10,000 contributed to their accounts in 2020 with 36% of the contributions coming from employers.

“We know many employers, despite market pressures, remained steadfastly focused on financial wellbeing and helping workers navigate their financial situation,” said Rob Austin, head of research at Alight. “Our research shows that many workers matched their employer’s efforts by making prudent decisions of their own, including spending less so they can contribute more to their nest eggs.”

For workers who were adversely impacted by the pandemic, the CARES Act allowed them to withdraw money from their retirement accounts with more favorable tax treatment and longer repayment periods—and approximately 5% of participants took this action. The legislation also allowed plans to suspend loan repayments in 2020 for both new and existing loans.

“The Coronavirus-related distribution paired with deferral of loan payments was the best way to deliver relief to the people who needed it most,” added Austin. “Even so, the relatively low percentage of participants who withdrew money signals that most people don’t want to jeopardize their retirement security by tapping their accounts. Instead, they’ve shown interest in financial wellbeing programs that include emergency funds and alternatives to costly 401k loans and withdrawals.”

Trading volume higher than previous years 

Spurred by the volatility of the stock market, 2.2% of balances were traded in 2020 compared to 1.8% in 2019.

The extremely high trading levels in the first quarter of 2020 showed that participants locked in losses for the year by selling low. Participants using personalized solutions like managed accounts were able to tailor their portfolios to match their risk tolerance better than target-date funds (TDFs).

Number of participants using TDFs decreased 

For the first time, there were fewer people using target-date funds at the end of the year than there were at the beginning of the year—the percentage dropped from 76% to 72%.

Moreover, one of three TDF users had money in another fund—a strategy the Alight report notes as going against the turnkey solution for which TDFs are designed.

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