Record investing in 401(k) accounts is yielding impressive results for retirement savers. If you are a Baby Boomer getting ready to retire, you likely wish you had $1 million set aside in your nest egg. However, if you are a typical Boomer, that amount is probably closer to $147,000. That’s the median retirement account balance for Baby Boomers cited by the 17th Annual Transamerica Retirement Survey, released in December 2016.
Fortunately, this sad fact may be changing. That’s because people have recently been socking more money away. Workers in 2015 saved 6.8% of their salaries in 401(k) and profit-sharing plans, versus 6.2% in 2010.
Record Amounts in 401(k) Accounts
The additional savings means 401(k) accounts and other defined contribution plans have accumulated almost $7 trillion to date. If the rate of increase continues, the amount workers are saving – plus contributions from their employers – could actually come close to the 10% to 15% of salary most experts say people should set aside for retirement. Total contributions, including those from workers, employers and profit sharing, are already averaging 12.4%. (For more, see The Basics of a 401(k) Retirement Plan.)
Should the recent positive movement in the stock market following the election of Donald Trump continue, the net effect could be a positive impact on your retirement bottom line. Here's what's behind this big bump in savings and what it tells us about how individuals – and employers – can shape a better future.
The Power of Automatic Enrollment
One factor behind the rise in savings is the fact that more companies immediately include their employees in the firm’s 401(k) plan upon hiring. The lack of additional paperwork and automatic deductions make the process seamless and almost invisible to employees.
Workers can opt out, but when they are automatically enrolled, 89% continue to make contributions and do not drop out. Without automatic enrollment, only 75% of employees sign up. Auto-enrolled employees save more too: 7.2% versus 6.3% for those who have to sign up in order to participate.
The Auto-Escalation Savings Bump
Another feature gaining acceptance is auto-escalation, in which a worker’s contribution rises on an annual basis. Auto-escalation can be for a set amount or percentage for either all workers or, in some plans, only those who are deemed not to be saving enough. Roughly 70% of Fidelity Investment’s 401(k) plans have an auto-enroll feature, and about 16% of them offer auto-escalation.
Canned Investment Plans
Continuing with the automation theme, many auto-enroll plans also automatically put the worker in an algorithmically recommended investment portfolio. In many cases you can adjust it as you gain investment proficiency, but for many people the canned plan works just fine.
These pre-selected investment plans are often in the form of target-date funds, which are a diversified group of investments based on your age and/or years until retirement. Currently, up to 66% of 401(k) plans offer target-date funds. Read Target-Date Funds vs. Risk-Based Funds for more about this option.
Fees Are Falling
A final component of auto-enrollment is that fees have been dropping. In fact, the total cost of administrating a 401(k) plan is down 17% since 2009. In fact, the costs associated with 401(k) plans that contain mutual funds have dropped 28%. Lower fees mean that you get to keep more of your money, which in turn means your retirement savings balance is higher. A Guide to Investor Fees will show you how big a difference it can make.
How Much Do You Need?
All this raises the question: How much should I have in my 401(k)? In part the answer depends on any other retirement income you may have. This includes Social Security, a defined-benefit pension (increasingly rare), stocks, bonds and other investments or assets. Another important factor is whether your employer has a matching program for your 401(k). If so, your personal contribution should be enough for you to get the full match.
Aside from that, the commonly accepted minimum contribution is 10% of your salary (15% is better) up to the amount the IRS permits employees to put into a 401(k). For 2017, that's $18,000, plus an additional $6,000 if you're age 50 or older. (For more, see Your 401(k): What’s the Ideal Contribution?)
The Bottom Line
The most important factor when it comes to investing in a 401(k) is consistency: Start early, keep putting money in and increase the amount or percentage as you are able. This is borne out in a 2016 study by the Employee Benefit Research Institute, which found that 20% of workers who consistently put money in their 401(k) plans had balances of more than $200,000, while the average worker accumulated just $60,000 to $76,000 over the same period.
The more you can automate – auto-escalation, investing in target-date funds and so forth – the better for most people. The trend has clearly shifted to saving more for retirement. There’s no better time to jump on that bandwagon than now.