More 401(k) Millionaires: A Closer Look at Retirement Savings Trends
A recent review by Fidelity Investments, a leading provider of 401(k) retirement plans, shows encouraging growth in retirement savings. The number of accounts with balances exceeding $1 million rose by 9.5% in the third quarter of this year.
Out of the approximately 24 million 401(k) accounts Fidelity oversees, 544,000 have now crossed the $1 million mark, up from 497,000 in the previous quarter. The average balance within this group reached $1.616 million, reflecting a modest increase from $1.595 million the prior quarter.
Progress Among Gen X Savers
For Gen X savers—those steadily approaching retirement—there’s promising news. Individuals in this group who have been saving for at least 15 years now hold an average balance nearing $600,000, marking a 6% uptick from the previous quarter. Fidelity also observed that average balances among savers with five, 10, or 15 years of contributions grew during the same period.
This progress stems not just from market gains but also from consistent saving habits. The average contribution rate, including both employee savings (9.4%) and employer matches (4.7%), remains strong at 14.1%.
“We continue to see a commitment to saving for retirement,” said Sharon Brovelli, president of Workplace Investing at Fidelity. “Staying consistent with retirement contributions through different market cycles is key to helping Americans build a foundation for financial wellness and security.”
Balancing Optimism with Reality
While the growth in millionaire accounts is notable, many savers are still far from reaching those heights. The average 401(k) balance across all accounts hit a record high of $132,300, up 4% from the previous quarter’s $127,100. However, the median balance—a more accurate measure for many workers—stood at just $30,600.
These numbers reflect a wide range of circumstances, including newer employees with small balances and lower-income workers who may struggle to save consistently.
Addressing Challenges with Cashing Out
Lower-income workers, often disproportionately represented by minorities, are among those most likely to cash out their 401(k) savings when changing jobs if their balances are modest (e.g., under $7,000). This can have long-term financial consequences:
- Tax penalties: Distributions are subject to income taxes, and early withdrawals before age 59½ incur an additional 10% penalty.
- Lost growth opportunities: Cashed-out funds miss out on the potential for tax-deferred growth.
To help mitigate this, Fidelity is highlighting the benefits of auto-portability features in 401(k) plans. Currently, 6,000 of the 26,000 plans Fidelity manages offer automatic rollover services for small balances. Such features ensure these funds remain invested and accessible for future use.
Looking ahead, auto-portability could become more common. According to the Plan Sponsor Council of America, 6% of plans have already adopted or plan to implement this feature soon, and nearly 26% are considering it.
The Long-Term Impact of Auto-Portability
Streamlining the transfer of small 401(k) balances between employers has significant potential. If widely adopted, auto-portability could preserve an estimated $1.6 trillion in retirement savings over 40 years, including $744 billion for 98 million minority job-changers, according to the Portability Services Network.
This consortium, which includes record keepers like Fidelity, Vanguard, TIAA, and Alight, as well as the Retirement Clearinghouse, aims to enhance retirement outcomes for underserved and under-saved workers.
By simplifying the process of preserving retirement savings, these initiatives could pave the way for a more secure financial future for millions of Americans.
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