A recent analysis conducted by Fidelity Investments, a major provider of 401(k) retirement plans, revealed a notable increase in the number of accounts with balances exceeding $1 million. In the third quarter, there was a 9.5% rise in such accounts, totaling 544,000 out of approximately 24 million participant accounts managed by Fidelity. The average balance in this group stood at $1.616 million, up from $1.595 million in the previous quarter.
For Gen Xers, the average balance for those saving for at least 15 years was just under $600,000, marking a 6% increase from the previous quarter. The data also showed that the average balance for participants saving for five, 10, or 15 years all saw growth during the quarter. This growth was attributed not only to market gains but also to a strong average savings rate of 14.1%, comprising employee contributions (9.4%) and employer matches (4.7%).
Fidelity emphasized the importance of consistent retirement contributions across market cycles to ensure financial wellness and security in the future. Despite these positive trends, many 401(k) participants still have balances well below $1 million, with the average account balance reaching a record high of $132,300, up 4% from the previous quarter. The median balance, representing the midpoint of all accounts, was just $30,600.
Lower-income employees, particularly minorities, are more likely to cash out their 401(k) savings when changing jobs if their balances are small, rather than rolling over the funds into a new employer's plan or an IRA. Cashing out incurs income tax and potential early withdrawal penalties, leading to missed opportunities for tax-deferred growth. Fidelity highlighted the issue and noted that auto-portability features, which facilitate automatic rollovers for small balances, are increasingly being adopted by retirement plans.
Widespread adoption of auto-portability could result in an estimated $1.6 trillion in additional retirement savings over 40 years, benefiting millions of minority job-changers. The Portability Services Network, comprising major retirement plan record keepers, aims to assist under-served workers in enhancing their retirement outcomes.
