401 (k) contribution rate hike, reduction in plan loans, return to normal



The average annual savings rate of 401 (k) for plan members hit a new high of 9.3 percent of workers’ earnings this year, according to a new study.

It is encouraging to see continued improvement in retirement savings rates, ”said Kevin Barry, president of workplace investing at Fidelity Investments.

Company analysis, released in August and based on 23,600 corporate defined contribution plans administered by Fidelity as of June 30, 2021, showed that workers were beginning to experience more stability and a sense of normalcy, compared to the results of participant surveys conducted by Fidelity last year.

The improvement in sentiment among 401 (k) savers was reflected in the results of this survey:

  • The percentage of 401 (k) loans outstanding is at an all time high. Less than one in five plan members (17.5%) had an outstanding loan on their 401 (k) in the second quarter of 2021, a record high. “While some workers may still have to use their 401 (k) to help with a financial challenge, the long-term trend shows a decrease in loan utilization,” the report notes.
  • Fewer people change asset allocation. Only 5.3% of 401 (k) savers changed their asset allocation in the second quarter, the lowest percentage since the fourth quarter of 2019.

In the past year, more than one in three (38%) of 401 (k) savers increased their savings rate, according to the survey, while 7% of workers decreased their savings rate.

The average 401 (k) balance rose to $ 129,300 in the second quarter of this year, up 4% from the first quarter and 24% from a year ago, Fidelity reported. Average account balances for 403 (b) plans, the savings plans most commonly used by charitable groups and educational institutions, are lower than 401 (k) balances, but have shown similar improvements over to last year.

Average retirement account balances

Q2 2011 Q2 2020 Q1 2021 Q2 2021
401 (k) plans $ 73,000 $ 104,400 $ 123,900 $ 129,300
403b) regimes $ 56,300 $ 91,100 $ 107,300 $ 113,300

Source: Fidelity second quarter 2021 retirement analysis.

Long-term involvement pays off

The overall average balance of those who have been in their continuous 401 (k) plan for 10 years first crossed the $ 400,000 threshold, reaching $ 402,700 in the second quarter of 2021, Fidelity reported. Among female investors, the 10-year continuing average balance of 401 (k) reached $ 324,700 in the second quarter.

Automatic features stimulate participation

Pioneering investments
How America is saving 2021 The report, released in August, also shows rising participation rates and rising average account balances compared to previous years.

Results are taken from Vanguard’s customer database of 1,700 employer-sponsored defined contribution plans, of which 9 out of 10 are 401 (k) or 403 (b) plans.

The graph below shows that more and more plan sponsors have added automatic features and a Roth option to their plans over the past 15 years.

Plan design changes

Planning functionality 2005 2010 2015 2020
Packages with automatic registration 5% 27% 41% 54%
Plans offering Roth contributions 42% 60% 74%
Plan-weighted participation rate * 74% 76% 81% 84%
Weighted participation rate by automatic enrollment participants ** 86% 92% 92%
Average account balance $ 67,856 $ 79,077 $ 96,288 $ 129,157

* The plan weighted participation rate is calculated to indicate the average plan participation rate.
** The participant-weighted participation rate considers all employees as if they belong to a single plan.
How America is saving 2021, Avant-garde. All data as of December 31, 2020.

“The adoption of automatic features, particularly automatic registration, was one of the main reasons we saw an increase in participation rates,” said lead author of the report, Jeff Clark, member of the advanced analytics team of Vanguard’s strategic retirement advisory group.

Automatic enrollment plans had a participation rate of 92%, compared to a participation rate of 62% for voluntary plans, he noted.

“Automatic enrollment also leads to higher total savings 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 to 6.8 percent for those using voluntary enrollment.
  • Employees who have worked for companies with automatic registration saved over 50% more for retirement in 2020 than people employed in voluntary companies.

Value of automatic contribution increases

David Stinnett, a director who heads Vanguard’s strategic retirement advisory group, added: “As impressive as the statistics are right now – the progress we’ve seen – the point is that if you’re going to implement the automatic enrollment, you must do this in tandem with the “automatic increase”, which increases employee annual contribution rates by 1% or 2% each year, capped at around 15% of employee earnings, or even 20% or more, if the workforce is predominantly high income, unless the employees opt out of the increase.

“Participants enrolled in a plan with automatic increase save, on average, 20-30% more after three years in the plan, compared to participants in an automatic enrollment plan that does not automatically increase the number of participants” , noted Stinnett.

He added: “Because we believe that the success of the retreat depends on the participants reaching a target savings rate of 12% to 15% as soon as possible, an automatic increase function, coupled with an automatic enrollment. . [with a default savings rate] at least at the employer match level, is a very effective way to help participants achieve their goal. “

Articles related to SHRM:

401 (k) Plan matching formulas and automatic features add value for participants,
SHRM online, July 2021

401 (k) Savings rates are on the rise and the SECURE law may push them higher, SHRM online, January 2020

[Small businesses can find offering a retirement plan to be daunting. SHRM is offering a program through Raymond James that may help. Visit www.shrm.org/401k to learn more.]



About Author

Leave A Reply