Number of 401(k) millionaires just increased 9.5%

CNN
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A new analysis from Fidelity Investments, one of the largest providers of 401(k) retirement plans, found that the number of accounts with balances over $1 million rose 9.5% in the third quarter.

Overall, of the approximately 24 million participant accounts in the 401(k) plans for which Fidelity serves as record keeper, 544,000 had balances exceeding $1 million, up from 497,000 in the second quarter.

The average balance in this group was $1.616 million, up from $1.595 million in the previous quarter.

According to Fidelity data, those of Generation

And it turns out that the average balance of all participants who saved for five, 10 or 15 years increased over the quarter.

The growth was driven not only by market gains, but also by a strong average savings rate of 14.1%, which includes employee contributions (9.4%) and an employer contribution (4.7%).

“We continue to see commitment to saving for retirement, with contributions to these vehicles remaining stable, if not increasing,” said Sharon Brovelli, president of Workplace Investing at Fidelity Investments. “Consistent retirement contributions throughout different market cycles are important … (as they) will help prepare Americans for a future of financial health and security.”

However, many 401(k) participants have balances well below $1 million, or even half that.

The average balance across all participant accounts reached a record high but was still only $132,300, up 4% from $127,100 in the second quarter. And the median – which represents the value below which half of the accounts had lower balances – was just $30,600.

Of course, these measures are applied to the accounts of people of all ages, income levels and lengths of employment, so they include small balances held by relatively new or young employees who have not long been saving in a company plan; and lower-income workers who may not be able to save much, regardless of age or length of employment.

These lower-income workers—who tend to be disproportionately in the minority—may be among those most likely to cash out their 401(k) savings when they change jobs when their balances are low (e.g. under $7,000), instead of rolling over the money into their new employer’s plan or into a tax-deferred IRA.

The payout is costly in several respects: The payout is subject to income tax in the year in which it is paid out; And if the person taking the money is under 59-1/2, they will also be hit with a 10% early withdrawal penalty.

And over time, they will also miss out on the benefits of the tax-deferred growth of that money if they had invested it without interruption.

In its report, Fidelity highlighted the issue. And it noted that 6,000 of the 26,000 401(k)s for which it serves as record keeper now have an auto-portability feature, providing an automatic rollover service for those with small balances.

This type of feature could become more common in the coming years. According to the Plan Sponsor Council of America, 6% of all plans have already done so or will soon do so, and nearly 26% are considering doing so.

Making it easier to transfer small 401(k) balances from one plan to another as your career progresses can pay off in the long run.

According to the Portability Services Network, a consortium of leading corporate retirement plan record keepers, widespread adoption of auto portability could preserve an estimated $1.6 trillion in additional retirement savings over 40 years, including $744 billion for 98 Millions of minority employees changing jobs like Fidelity, Vanguard, TIAA and Alight, as well as the Retirement Clearinghouse.

It was established to help “underserved and underserved workers” improve their retirement outcomes.