If you have a 401(k) at work, you are one of more than 100 million Americans covered by a defined contribution, or DC, plan. Those assets, along with IRAs, make up 33% of all household financial assets in the U.S., according to the Investment Company Institute.
DC plans are the “dominant” retirement plan that private-sector employers sponsor in the U.S., reported Vanguard, a major 401(k) record-keeper. Nearly 1 out of 2 private-sector workers are covered by such plans.
“The old, and effective, retirement income equation — comprised of traditional defined benefit (DB) pension plan payments, DC plan assets and Social Security benefits — is no longer the default strategy for most future retirees,” according to consulting company Willis Towers Watson. Now, the “vast majority” of retirement plan sponsors offer only the DC plan to new employees.
That makes employees responsible for their retirement security. A natural question to ask is how participants did in the 10 years since the market bottomed on March 9, 2009. Fidelity, a major 401(k) provider, analyzed the 1.64 million 401(k) accounts that were continuously invested in the same 401(k) plan over the past 10 years. Millennials’ 401(k) accounts grew the most (cumulative increase over the 10 years of 1,762%), followed by Gen Xers (626%) and boomers (367%).
While you can’t benchmark these returns as they involve contributions, they tell me that millennials did not stop investing in equities. That’s important, since the tendency is to go to cash when markets decline.
Recent trends also are positive. Assets in 401(k)s and IRAs are increasing, and so are 401(k) balances. For example, Fidelity had 180,000 401(k) participants with $1 million or more in their 401(k)s. That number is up from 133,800 at the end of 2018. Fidelity’s IRA millionaires increased to 168,100, up from 138,800 during the same period.
Employee contributions are increasing as well. Fidelity reported the average 401(k) employee contribution to be a record $2,370 (for the first quarter of 2019), a 15% increase over one year earlier.
Employer contributions are also trending higher. The average 401(k) employer contribution is now $1,780 per employee, a record high and a 6% increase from one year earlier, reported Fidelity. Translated into a percentage of salary, the average 401(k) employer contribution rate is a record high of 4.7%. Fidelity reported that the average total savings rate (employee contributions plus company match) also reached an all-time high of 13.5%.
This is not surprising. According to Capital Group, “a significant number of American companies — in all sectors — have publicly announced plans to boost their 401(k) and other retirement plan contributions due to tax reform.”
Among the companies that increased their matching contributions, as reported by Capital Group, are: Advance Financial, Aflac, AutoNation, Cigna Corp., Mastercard, MetLife, Nationwide Insurance and Visa.
Others made additional contributions to 401(k) plans in 2018, including American Express, F.N.B. Corp., Hostess Brands and SunTrust Banks. Advance Financial and Aflac both increased the match and made additional employer contributions.
As a proponent of investor education and retirement investing, I’m a firm believer in 401(k)s. The key is education and action. As Kevin Barry, president of Workplace Investing at Fidelity Investments, said in a release, “One of the most important aspects of a retirement savings strategy is making sure you’re contributing enough to reach your goals.”
Clearly, many people are. If you are one of them, I challenge you to mentor other employees. Sarah Arel, benefits manager of W.E. Aubuchon, said, “As we have learned over the years, daily peer-to-peer conversation is key when it revolves around company benefits and can be more powerful than written communication from our corporate office.”