On Wall Street, they like to say that a rising tide lifts all boats—meaning that when the stock market is doing well, pretty much every investor benefits. That certainly seems to be the case right now among those with a 401(k) plan.
Savers are putting away more money, opening more retirement accounts, seeing bigger balances, and borrowing less from their tax-advantaged plans than has been the case for years, according to a new report from Fidelity Investments.
The average 401(k) balance in Fidelity-administered plans rose to a record $92,500 at year-end, up $4,300 from the previous year. The average IRA balance at Fidelity was $93,700, up $3,600 from the previous year.
These auspicious trends are due in large part to the rising stock market and growing economy, as well as an improving jobs picture and rising home values. But Fidelity also notes heightened sensitivity among employers to the need for better communication with employees and expanded financial wellness programs for those workers.
Over the past year, simpler and more individualized messaging to 401(k) participants around enrollment, saving and investing has doubled the level of plan engagement, Fidelity says. This means more workers are doing things like checking their balances, changing contribution rates, making adjustments to their investments, and logging into advice tools.
Indeed, Fidelity reports a surge in workers taking advantage of financial education programs, including web-based seminars and online financial planning tools. Attendance at live web sessions is up 52% and on-demand seminars, up 62%. Since launching its interactive money check-up in June, Fidelity has seen more than 300,000 plan participants visit the site, which helps people understand things like whether they are saving enough and how much risk is appropriate.
The rising stock-market tide probably remains the chief driving force behind the encouraging trends in 401(k) and IRA balances. But the numbers were also helped by employee contribution rates, which recovered to pre-financial-crisis levels. The average contribution rate to Fidelity 401(k)s reached 8.4% in the fourth quarter, the highest level in more than eight years. Over the past 12 months, employee contributions plus employer match added a record $10,200 to the typical account.
Recognizing the ill effects of 401(k) plan loans, employers have begun to make them more difficult to get, Fidelity says. Some now restrict workers to one loan at a time and may require that they wait at least six months between payoff and taking another loan. Others have begun restricting loans to the amount an employee has contributed to the plan, as opposed to the full balance that may include an employer match or profit sharing. Still others are raising the interest rate.
That has contributed to a steep falloff in 401(k) borrowing. Participants with an outstanding loan dropped to 21%, the lowest level in seven years, Fidelity said.
Fewer loans may be the healthiest development. Most financial planners say 401(k) loans should be a last resort. Many of these loans never get repaid. That's because borrowers often leave the company and don't have the cash to repay, so the loan is then treated as a taxable distribution. This “leakage” from tax-advantaged savings not only incurs possible tax and penalties but also results in lost portfolio growth that threatens to leave many savers far behind their retirement goals.