A new analysis by Fidelity Investments, one of the largest providers of 401(k) retirement plans, found that the number of accounts with balances topping $1 million rose by 9.5% in the third quarter.
All told, of the roughly 24 million participant accounts in the 401(k) plans for which Fidelity serves as record keeper, 544,000 of them had balances over $1 million, up from 497,000 in the second quarter.
The average balance in that group was $1.616 million, up from $1.595 million in the prior quarter.
Among Gen Xers — who are next in line for retirement — those who have been saving for at least 15 years had an average balance of just under $600,000, up 6% from the quarter before, according to Fidelity data.
And it found that the average balance for all participants who were saving for five, 10 or 15 years rose during the quarter.
The growth was due not just to market gains, but also a strong average savings rate of 14.1%, which includes employee contributions (9.4%) plus an employer match (4.7%).
“We are continuing to observe a dedication to saving for retirement, with contributions to these vehicles holding steady if not increasing,” said Sharon Brovelli, president of Workplace Investing at Fidelity Investments. “Consistent retirement contributions during various market cycles is important … (since they) will help set Americans up for a future of financial wellness and security.”
For many 401(k) participants, however, their balances are far below $1 million or even half that.
The average balance for all participant accounts hit a record high, but it was still just $132,300, up 4% from $127,100 in the second quarter. And the median — which represents the level below which half of the accounts had lower balances — was just $30,600.
Of course, these measures are taken across the accounts of people of all ages, income levels and tenures, so they include small balances from relatively new or young employees, who haven’t been saving in a company plan for long; as well as lower-income employees, who may not be able to save a lot regardless of age or tenure.
A cure for cashing out
Those lower-income employees — who tend to be disproportionately minorities — may be among those most likely to cash out their 401(k) savings when they change jobs if their balances are small (e.g., under $7,000), instead of rolling the money over into their new employer’s plan or a tax-advantaged IRA.
Cashing out is costly in a few ways: The distribution will be subject to income tax the year it’s taken; and if the person taking the money is under 59-1/2, then they will be hit with a 10% early withdrawal penalty too.
And, over time, they will also lose out on the benefit of tax-deferred growth on that money had they left it invested without interruption.
In its report, Fidelity highlighted the issue. And it noted that 6,000 of the 26,000 401(k)s for which it serves as record keeper now have an auto-portability feature, which provides an automatic rollover service for those with small balances.
That kind of feature may become more common in the years ahead. To date, 6% of all plans have already implemented it or will do so soon, and nearly 26% are considering it, according to the Plan Sponsor Council of America.
Making it easier to move small 401(k) balances from one plan to another throughout your career can pay off in the long term.
If auto-portability were adopted widely, it could preserve an estimated $1.6 trillion in additional retirement savings over 40 years, including $744 billion for 98 million minority job-changers, according to the Portability Services Network, a consortium of leading workplace retirement plan record keepers like Fidelity, Vanguard, TIAA and Alight as well as the Retirement Clearinghouse.
It was set up to help “under-served and under-saved workers” improve their retirement outcomes.