As 401(k) Contributions Climb, So Does the Number of 401(k) Millionaires

Average employee contribution rate is now nearly 9 percent of pay

Stephen Miller, CEBS By Stephen Miller, CEBS August 28, 2019
As 401(k) Contributions Climb, So Does the Number of 401(k) Millionaires
updated September 6, 2019

Who wants to be a millionaire? Your employees probably do, and some are, thanks to making good use of their worksite 401(k) plan.

Employees' 401(k) savings rates hit record levels this year, as the average contribution that workers defer from their paychecks climbed to 8.8 percent as of midyear. That's nearly a full percentage point higher than the average savings rate 10 years ago, according to Fidelity Investments' analysis of more than 30 million retirement accounts.

As of midyear, the average annual employee plan contribution was $7,050, Fidelity reports, an increase of $980 over the past five years. The average employer contribution was $4,070, up $530 over the same period.

One result of higher contribution rates is an increase in the number of 401(k) participants with $1 million or more invested in plans Fidelity manages, which rose to a record-high 196,000, up from 168,000 in the middle of last year. The average 401(k) millionaire has been contributing to his or her plan for 28 years, and a quarter of 401(k) millionaires make $161,000 a year or less, the firm noted.

Vanguard Investments, another big 401(k) plan services firm, also saw a new high in the number of 401(k) millionaires—55,900 as of June 30 among the more than 5 million defined contribution plans it manages, up from 40,700 at the end of 2018.

These findings suggest that a good message for plan sponsors to share with employees is "if you've got time on your side and patience, there's a good chance you can become a millionaire, too," Washington Post personal finance columnist Michelle Singletary wrote.

Tell employees: 'If you’ve got time on your side and patience, there’s a good chance you can become a millionaire, too.'

While only a small portion of plan participants are currently millionaires, the average balance at Fidelity reached $305,900 among participants who have been in their 401(k) plan for 10 years, more than five times the average balance of $59,900 for this group 10 years ago.

"Increasing your contribution rate, even by 1 percent, can make a big difference in your long-term retirement savings," said Kevin Barry, Fidelity's president of workplace investing. "What may seem like a small amount today can have a significant impact on your account balance in 10 or 20 years."

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Employers Raise Default Savings Rates

The percentage of employers that automatically enroll new employees in the company's 401(k) has increased to nearly 35 percent, Fidelity found. As the number of employers that automatically enroll employees has grown, the default contribution rate for auto-enrolled employees has also steadily increased. As of midyear, 20 percent of plan sponsors auto-enrolled employees at a contribution rate of at least 6 percent of their paycheck, which is more than three times the number of plan sponsors that did so 10 years ago.

At Vanguard, participants who joined a plan through automatic enrollment last year had an average deferral rate of 6.7 percent. While that's slightly lower than the savings rate of 7.1 percent for participants in Vanguard's plans with only voluntary enrollment, participation rates among new hires nearly doubled to 93 percent under automatic enrollment, compared with 47 percent under voluntary enrollment.

Vanguard's analysts also reported that higher default deferral rates are accepted by participants in auto-enrollment plans, as opt-out rates didn't rise when higher default percentages were used to enroll employees.

To improve employee participation and overall savings rates—and to further raise the number of 401(k) millionaires—the analysts recommended increasing minimum default contribution rates, "including an automatic increase feature with a cap of at least 10 percent, and periodically 'sweeping' eligible nonparticipants into the default design."

A Bit of Encouragement

"Employers shouldn't be wary of auto-enrolling their employees in their 401(k)," said Amy Ouellette, director of retirement services at 401(k) advisory firm Betterment for Business. "Getting savings started should be a given—your employees will thank you for this later."

Employees need to be saving more than the bare minimum toward retirement throughout their career, and "3 percent of pay won't be enough to confidently retire," she added. "Encourage them to aim for at least 6 percent, and then to try to work their way up to 10 to 15 percent over time," which can include the employer's contribution.

Point out that employees can make additional 401(k) contributions from any bonuses they may receive during the year, perhaps "saving 50 percent of an upcoming bonus, so they can feel good about boosting savings and splurging with the rest," Ouellette advised.

When they receive their annual raise, the message should be to "consider bumping up your savings rate by 1 to 2 percent; you'll enjoy faster savings growth and won't feel the impact on your take home pay," she suggested.

For their part, employers that annually auto-escalate contributions should consider timing participants' automatic 401(k) increases with company raises. "Employees still can still get a pay bump and their long term savings will grow even faster," Ouellette noted.

Related SHRM Articles:

For 2019, 401(k) Contribution Limit for Employees Rises to $19,000, SHRM Online November 2018

Who Wants to Be a 401(k) Millionaire, SHRM Online, August 2018

Push 401(k) Default Savings Rates Higher, Researchers and Plan Sponsors Agree, SHRM Online, October 2017


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