Does your company offer a 401(k) plan? If so, how much of a contribution does the company make? According to a recently released Fidelity report, the size of employer 401(k) contributions is at an all-time high. One of the results of the increased generosity is that American workers are setting aside more for retirement.
This sort of news would not have been a big deal 20 years, when pensions were more popular than 401(k) plans. But pensions are no longer sustainable for most companies. As such, the 401(k) has become the de facto retirement plan among companies that offer a retirement benefit. That makes employer contributions more important than ever before.
Contributions by the Numbers
Now that you know employers are contributing more, let us look at the hard numbers. Fidelity data shows that the average employer contribution to 401(k) plans during the first quarter of 2019 was 4.7%. Higher employer contributions also pushed the total contribution rate to a record 13.5% during that same period.
For the record, the total contribution rate is the combined contributions of employer and employee. It is unclear if the higher rate in Q1 was due only to higher employer contributions or the result of both parties contributing more. It would be nice if it were the latter.
Saving for Retirement
A 4.7% matching contribution is nothing to laugh at if you are an employee. Remember that the whole point of enrolling in a 401(k) plan is to put money aside for retirement. Just to give you an idea of why employer contributions are so important, let's look at numbers from a Stanford Center on Longevity report published in 2018.
That report showed that an employer beginning to save in a 401(k) at age 25 would have to set aside anywhere between 10% and 17% of his/her income in order to have enough money to retire at age 65. Assuming that 10% is adequate, and employer contribution of 4.7% takes care of just about half.
Of course, the numbers from that report are just estimates. They don't account for unknown influences, like market fluctuations for example. A worker could invest throughout his/her entire working career only to have his/her 401(k) collapse in his/her late 50s. By the same token, that worker could delay saving until age 40 and still do very well thanks to strong market influences.
Now the Bad News
Things look good as far as 401(k)s and employer contributions go. But there's a flip side to every coin. The flip side here is that too many people still are not saving for retirement whatsoever. According to CNBC, the number hovers around 25% of adults. The majority of them may be hoping and praying that Social Security pays their bills in retirement.
Among those who do have 401(k) accounts, the average current balance was just over $103,000. Fidelity is quick to point out that the real amount people have in their accounts varies by age. That makes sense given that older people who have been saving for many more years tend to have higher account balances. But again, there's bad news. You won't get far on $103,000 if you're accustomed to living on $50,000 annually.
So that's where we are with 401(k) plans at the moment. Does your company offer one? If not, we invite you to contact us to learn more about our innovative retirement plans. We work with leading advisors and providers to offer our clients some of the most innovative retirement solutions on the market. We would be happy to discuss them with you.