How to Become a 401(k) Millionaire (TROW)

December 16, 2015 — 1:35 PM EST

Fidelity Investments recently reported that among 401(k) plans it administers the average account balance reached a record high of $91,300 at the end of 2014. Moreover, the number of retirement savers with account balances of $1 million or more reached a record of about 72,000. This is approximately twice as much as at the end of 2012 and about five times more than a decade ago.

Certainly a strong stock market since the lows of March 2009 has helped fuel these increases. Beyond that there are some steps that retirement savers can take to become 401(k) millionaires or to at least maximize the amount of their retirement savings. (For more, see: The 401(k) and Qualified Plans Tutorial.)

Contribute Consistently and Enough

Becoming a 401(k) millionaire is a slow process, akin to running a long distance race versus a sprint. The first step is to get started. When you first become eligible contribute as much as you can. At the very least try to contribute enough to earn the full match if one is offered by your employer. According to Fidelity, the average 401(k) millionaire was contributing about 16% of their salary or about $21,400.  

No matter how much you can initially afford to contribute it’s important to get started. If you can only afford 3% to start do it. Try to increase that to 4% or 5% the next year and each year until you are approaching the maximum contributions allowed. These levels are currently $18,000 for 2015 with an additional $6,000 catch up contribution for those who are 50 or over at any point during the year. Be sure to utilize this catch up even if your regular contributions are capped due to failed plan testing or other reasons. (For more, see: Reasons to Boost Your 401(k) Contributions.)

Invest Appropriately

It is important to make sure that you are investing your 401(k) account in accordance with your financial objectives, age and risk tolerance. There are countless stories of plan participants in their 20s with all or a large percentage of their account in their plan’s money market or stable value option. On the other hand the torrid stock market of the past several years is in large part responsible for the surge in the average 401(k) account balance and the number of 401(k) millionaires. 

Your account can’t grow if you don’t take appropriate risk, but you also need to manage that risk by doing things such as periodically rebalancing your account to control the level of investment risk. (For more, see: Pick 401(k) Assets Like a Pro.)  

Don’t Neglect Old 401(k) Accounts

Becoming a 401(k) millionaire is not restricted to just your current 401(k) account. Combined across several, such as your current account plus 401(k) accounts from old employers, the points mentioned above still apply. It is important to be proactive with your 401(k) account whenever you leave a job. Whether you roll the account over to an individual retirement account (IRA), leave it in the old plan or roll it to a new employer’s plan if allowed do something, make a decision.  Leaving an old 401(k) account unattended could be a huge detriment to your retirement savings efforts.

Target Date Funds Not a Magic Bullet 

Target date funds were deemed a safe harbor investment option as part of the Pension Protection Act of 2006. This means that they can be used as a default option by plan sponsors when employees don’t make an investment choice on their own. (For more, see: An Introduction to Target Date Funds.)

Target date funds are also big business for the mutual fund companies offering them. Large providers such as Fidelity, Vanguard and T. Rowe Price Group Inc. (TROW) would love for you to not only invest in these offerings in your 401(k) plan but to stay invested in them when you leave an employer and roll your money to an IRA.

Target date funds can be a good option for younger investors such as those in their 20s who may not have other investments outside of the plan as these funds offer an instant diversified portfolio. Once you’ve been working for a while hopefully you have some outside investments. By the time you in your 40s a more tailored portfolio that fits your overall situation may be more appropriate.

One of the big selling points touted by target date fund issuers is the glide path into retirement. Investors need to understand this glide path and decide if it is right for their retirement situation. (For more, see: The Pros and Cons of Target-Date Funds.)

The Value of Financial Advice

Financial advisors with clients who participate in a 401(k) plan or other employer sponsored defined contribution plans have a great opportunity to help their clients get ready for retirement and perhaps become 401(k) millionaires. Advisors have a view of their client’s overall financial picture. They can look at the current 401(k) plan in the context of a client’s total investment assets which might include IRAs, annuities, a spouse’s retirement plan, a pension plus taxable investments and other assets.

From a business development point of view a client working with a trusted financial advisor who is helping them maximize the benefit of their company retirement plan is likely stay with that advisor when it comes time to roll the 401(k) account over. Clients should also expect to pay a fee for this advice as well. (For more, see: 8 Essential Tips for Retirement Saving.)

Many plans offer their participants access to investment advice via their plan provider or outside online services available. The quality of this advice varies and savvy participants will want to do their homework before using these services as many involve paying a fee. Among the questions to ask is whether or not the allocation suggested takes outside investments and your overall situation into account.

Providing advice both to plan sponsors and to plan participants is an opportunity for financial advisors versed in the workings of 401(k) plans. (For more, see: Why Retirement Advice is Better but Still Lacking.)

The Bottom Line

Whether or not you actually amass $1 million, taking action early and continuously during your working life is key to maximizing the value of your 401(k) account.  Contribute consistently, enough, invest appropriately for your situation, don’t ignore your old 401(k) accounts and seek advice if needed. 

The 401(k) gets a lot of bad press but if managed appropriately it can be a key tool in building a retirement nest egg. (For more, see: How to Save More for Your Retirement.)