The average annual 401(k) savings rate for plan participants
reached a new high of 9.3 percent of workers' earnings this year, according to
new research.
"It's encouraging to see a continued improvement of
retirement savings rates," said Kevin Barry, president of workplace
investing at Fidelity Investments.
The firm's analysis, released in August and based on 23,600
Fidelity-administered corporate defined contribution plans as of June 30, 2021,
showed workers starting to feel more stability and a sense of normalcy,
compared with the results of participant surveys Fidelity conducted last year.
Improved sentiment among 401(k) savers was reflected in
these survey findings:
The percentage of outstanding 401(k) loans is at a record
low. Less than 1 in 5 (17.5 percent) of plan participants had an outstanding
loan from their 401(k) in the second quarter of 2021, a record low. "While
some workers may still have to tap their 401(k) to help address a financial
challenge, the long-term trend shows decreasing loan use," the report
noted.
Fewer people are making changes to the asset allocation.
Only 5.3 percent of 401(k) savers made a change to their asset allocation in
the second quarter, the lowest percentage since the fourth quarter of 2019.
Over the last year, more than 1 in 3 (38 percent) of 401(k)
savers increased their savings rate, the survey found, while 7 percent of
workers decreased their savings rate.
The average 401(k) balance increased to $129,300 in the
second quarter of this year, up 4 percent from the first quarter and an
increase of 24 percent from a year ago, Fidelity reported. Average account
balances for 403(b) plans, the savings plans more commonly used by charitable
groups and educational institutions, are lower than 401(k) balances but showed
similar improvements from last year.
Long-Term Participation Pays Off
The overall average balance for those who've been in their
401(k) plan continuously for 10 years crossed the $400,000 threshold for the
first time, reaching $402,700 in the second quarter of 2021, Fidelity reported.
Among female investors, the average 10-year continuous 401(k) balance reached
$324,700 in the second quarter.
Automatic Features Drive Up Participation
Vanguard Investments How America Saves 2021 report, released
in August, also shows rising participation rates and increasing average account
balances compared with prior years.
The findings are derived from Vanguard's client database of
1,700 employer-sponsored defined contribution plans, of which 9 out of 10 are
401(k) or 403(b) plans.
"Adoption of automatic features—particularly automatic
enrollment—has been one of the primary reasons we have seen an increase in
participation rates," said report lead author Jeff Clark, a member of the
advanced analytics team in Vanguard's strategic retirement consulting group.
Plans with automatic enrollment had a 92 percent
participation rate, compared with a participation rate of 62 percent for plans
with voluntary enrollment, he noted.
"Automatic enrollment also leads to higher total saving
rates, which include both employee and employer contributions," Clark
added. Vanguard's analysis, he noted, shows that last year:
Employees in plans using automatic enrollment saved an
average of 10.7 percent of their annual salary, compared with 6.8 percent for
those using voluntary enrollment.
Employees who worked for firms with automatic enrollment
saved over 50 percent more for retirement in 2020 than those employed at firms
with voluntary enrollment.
Value of Automatic Contribution Increases
David Stinnett, a principal who heads Vanguard's strategic
retirement consulting group, added: "As impressive as the stats are right
now—the progress we've seen—the fact of the matter is if you're going to
implement automatic enrollment, you really need to do that in tandem with
automatic increase," which raises employees annual contribution rates by 1
percent or 2 percent every year, capped at around 15 percent of employees'
earnings—or even 20 percent or higher, if the workforce is predominantly made
up of high earners—unless employees opt out of the increase.
"Participants enrolled in a plan with automatic
increase save, on average, 20 percent to 30 percent more after three years in
the plan, compared with participants in an automatic enrollment plan that does
not automatically increase participants," Stinnett noted.
He added, "Because we believe retirement success hinges
on participants reaching a target savings rate of 12 percent to 15 percent as
soon as possible, an automatic increase feature—coupled with automatic
enrollment [with a default savings rate] at least at the employer-match
level—is a very powerful way to help participants reach their target."
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