Retirement Balances Up, Participation Still Low

Here’s some good news on the savings front: retirement account balances hit record highs in Q4 2019, according to Fidelity Investments. Here are some of the statistics from the report:

The average 401(k) balance rose to $112,300, a new record high and a 17 percent bump from a year ago; the average 403(b)/tax exempt account balance increased to $93,100, up 18 percent from the prior year; and the average IRA balance also rose to a record $115,400, a 17 percent increase from one year ago. And then there’s this kicker, which got a lot of play among financial outlets: “there are a record 441,000 401(k) and IRA millionaires!”

The record levels make sense: as the economy and labor market have improved during the recovery, workers have been saving more. In the fourth quarter, the government reported that overall savings as a percent of disposable income was 7.7 percent, which is just about the level seen since the Great Recession.

When it comes to retirement savings, Fidelity found that the average employee savings rate reached a record 8.9 percent at the end of last year. Including company matches, the retirement savings rate increased to 13.5 percent. Additionally, over the course of 2019, a third of participants increased the amount they are saving by an average of over 3 percent.

Bottom line: the jump in retirement savings, along with a roaring bull market (the S&P 500 was up about 30 percent in 2019) delivered a sterling year for participants.

But without sounding like too much of a buzz kill let’s put this information into a bit more context. It’s great to feel progress, especially as we approach the eleven year low of U.S. stock indexes (on March 9, 2009, the Dow Jones Industrial Average closed at 6547, its lowest level since April 15, 1997; the S&P 500 was at 676, its lowest level since Sept 12, 1996; and the NASDAQ settled at 1268, its lowest level since Oct 9, 2002), but more work is needed.

For example, while average balances are important, a better picture emerges by looking at the median account value. The reason is simple: average numbers can be thrown off by big account values. (Those retirement millionaires represent less than 2 percent of the near 30 million total number of Fidelity retirement accounts.)

When observing the median account value (the mid-point of a series, in which half of the results are above the median level and half are below it), the numbers are less notable. For example, the median account value for a 401(k) is $27,000, versus the average $112,300. Some may complain that the median is also problematic, because it includes those accounts with zero balances, but the lower number probably is a better example of what’s going on for many of the country’s retirement and would-be retirement savers.

The biggest hurdle for Americans is the lack of access to an employer plan.  According to the Bureau of Labor Statistics, 60 percent of workers had access to a defined contribution plan in 2019, which leaves a big chunk of folks who don’t.

While it may seem easy to simply open up an IRA account and save on your own, workers who have access to a company plan are more likely to participate. That’s why a component of the recently passed SECURE Act included a way for smaller businesses to come together and create a single shared retirement plan. The hope is that these pooled plans will provide economies of scale and reduce overall costs because the participating businesses share expenses and administrative burdens, constraints that employers without plans often cite.