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Young participants have lower deferral rates; Roth participants saved more
The average 401(k) balance in plans administered in the U.S. by Fidelity Investments, one of the largest plan service providers, reached a record high of $77,300 at the end of 2012, the investment firm reported, up from $69,100 one year earlier—an increase of 12 percent. About two-thirds of the 2012 increase was attributable to market action, and one-third was due to participant contributions.
Participants on average saved 8 percent of their annual salaries in their 401(k) plans. When the typical employer contribution is factored in, be it a match or profit sharing, the average participant’s total savings rate increases to 12 percent.
Roth Participants' Higher Savings Rate
At the end of 2012, 37 percent of 401(k) plans administered by Fidelity offered a Roth savings option, up from 12 percent five years earlier.
Roth contributors also boasted a higher savings rate, deferring an average of 11 percent of salary. When factoring in employer contributions, Roth participants show a total savings rate of 15.3 percent—more than 3 percentage points higher than the overall average.
Nearly six out of 10 (59 percent) of Roth participants use a tax-diversification strategy of saving a portion in a post-tax Roth 401(k) and a portion in a pre-tax traditional 401(k) option.
Younger investors tended to use Roth plans the most; 10 percent of participants in their 20s contributed to a Roth account, while only 6 percent of participants overall did so, Fidelity reported.
Young participants may be well-positioned to benefit from Roth plans because of their long investment horizon and the likelihood they will be in a higher tax bracket at retirement. A distribution from a Roth 401(k) is tax-free and penalty-free, provided the funds being withdrawn have remained in the account for at least five years and one of the following conditions has been met: the participant has reached age 59½ or has become disabled, or the distribution is taken by beneficiaries after the participant's death.
Overall, Generation X and Y Savings Lag
A separate 401(k) savings study highlights how well, or not, young workers are preparing for retirement. On average, Generation X workers (born 1965-1980) have contributed to their current employer’s defined contribution plan for nine years, accumulating nearly $70,000, according to a January 2013 report, Sowing the Seeds for Retirement: Gen X and Gen Y Markets, from research firm LIMRA.
The median deferral rate was 6 percent for all Generation X workers, but slightly higher for men (7 percent), the study found. Given that Generation X consumers are over age 30, their deferral rates are typically recommended to be above 10 percent. However, less than half (43 percent) were contributing 8 percent or more.
Meanwhile, Generation Y workers (born 1980-2000) have contributed to their current employer’s defined contribution plan for four years, accumulating slightly less than $26,000. The median deferral rate for Generation Y workers is 6 percent, with one in five Generation Y workers contributing 3 percent or less to their current employer’s defined contribution plan.
“There’s a lot of attention on the Baby Boomers (78 million), but there are nearly 116 million Americans aged 20 to 47, and we need to help these Americans plan and save for retirement,” said Cecilia Shiner, senior analyst, LIMRA Retirement Research. “Most Gen X and Y Americans will have to rely solely on their savings to fund their retirement, yet few are taking full advantage of the retirement savings vehicles available to them.”
Among Generation X and Y workers with access to a 401(k) or other defined contribution plan, those who had never made contributions were more likely to feel less knowledgeable about investments and financial products than those currently contributing to their plan, according to the study. "This finding suggests that if financial literacy could be improved for these consumers, the likelihood of participating in their employers’ plans may rise," Shiner said.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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