In a recent analysis conducted by Fidelity, it was revealed that the average 401(k) plan savings rate, which includes both employee and company contributions, has reached a record high of 14.2%. This percentage is incredibly close to the recommended benchmark of 15% set by Fidelity for individuals looking to maintain their current lifestyle in retirement. It is important to note that while the 15% goal is a good starting point, the right retirement savings rate can vary based on individual circumstances such as age, expected retirement date, cash flow, projected Social Security income, pensions, and other retirement plans.
On average, employees contributed 9.4% of their income to their 401(k) plans during the first quarter, while companies added an average of 4.8% through matches, profit-sharing, and other deposits. According to Mike Shamrell, Vice President of Thought Leadership for Fidelity’s workplace investing, the most common match formula for Fidelity plans involves a 5% contribution rate with a 100% match on the first 3% of employee deferrals and a 50% match on the next 2%. This means that employees have the opportunity to maximize their savings by taking advantage of company matches.
Certified Financial Planner Andrew Herzog suggests that households should aim for target savings rates ranging from 10% to 30%, depending on their specific circumstances. For example, a 20-year-old with limited income may struggle to save 10%, while a 50-year-old couple may need to aim for a 20% savings rate to achieve their retirement goals. It is crucial for individuals to assess their financial situation and set realistic savings targets that align with their long-term objectives.
Many companies have adopted automatic enrollment policies for their 401(k) plans, where eligible employees are automatically signed up unless they choose to opt-out. This has led to a default contribution rate of 4.1%, with nearly 40% of plans starting employee deferrals at 5% or higher. Additionally, automatic 401(k) contribution increases have played a significant role in boosting savings rates. Shamrell notes that over 33% of plan participants increased their contributions at the end of 2023, with three-quarters of those increases being automatic adjustments.
The combination of auto-enrollment, company matches, and automatic contribution increases has contributed to positive trends in 401(k) savings rates. According to Shamrell, around 78% of plans that auto-enroll employees also offer auto-escalation features. This proactive approach to retirement savings helps individuals incrementally increase their contributions over time, ultimately leading to a more secure financial future in retirement.
The average 401(k) plan savings rate hitting a record high signals a positive shift towards better retirement preparedness. By setting realistic savings targets, taking advantage of company matches, and leveraging automatic enrollment features, individuals can take proactive steps towards achieving their long-term financial goals. It is never too early or too late to start saving for retirement, and every contribution made today will have a lasting impact on financial security in the future.