Recent reports on the state of 401(k) plans in America show that while Americans are saving more, there is still a pressing need for further action. Vanguard’s annual report, How America Saves 2024, provides insights into the savings habits of nearly five million participants in 401(k) plans sponsored by Vanguard and Fidelity. While stock market returns are on the rise and automatic enrollment plans have led to increased savings, the median 401(k) balance for individuals nearing retirement remains alarmingly low.
One of the key takeaways from the report is that Americans continue to rely heavily on Social Security as a significant portion of their retirement income. This highlights the importance of 401(k) plans as the primary private savings vehicle for retirement, with over 100 million Americans covered by these plans and more than $10 trillion in assets. However, the low median 401(k) balance for individuals approaching retirement age underscores the need for a more robust savings strategy.
One positive trend identified in the report is the impact of automatic enrollment on plan participation and savings rates. Thanks to a change in the law a few years ago, a record-high 59% of plans now offer automatic enrollment, leading to a significant increase in participation rates. Participants in plans with automatic enrollment had a participation rate of 94%, compared to 67% for voluntary enrollment plans. This shift has also contributed to higher savings rates, with the average participant contributing 7.4% of their savings and a total contribution rate of 11.7%.
The report also sheds light on the investment preferences and trading habits of 401(k) plan participants. Vanguard’s investors show a strong preference for equities and target date funds, with 74% of contributions going towards equities and 64% of investments being directed into target-date funds. Interestingly, only 5% of participants engaged in any trading within their accounts in 2023, with the majority opting for a hands-off approach to their investments. This trend has been attributed to the increased adoption of target-date funds and the decline in participant trading over the past 15 years.
One of the most concerning findings in the report is the significant disparity between the average and median account balances of 401(k) plan participants. While the average account balance for Vanguard participants was $134,128 in 2023, the median balance was only $35,286. This gap is largely driven by a small group of investors with large balances, with 40% of participants having less than $20,000 in their retirement accounts. For individuals approaching retirement age, the median account balance of $88,488 is particularly concerning, as it may not be sufficient to sustain them through retirement.
While 401(k) plans are a critical component of retirement savings, it is essential for individuals to diversify their savings across multiple sources. The report highlights the need for a comprehensive approach to retirement planning, which includes maximizing contributions to 401(k) plans, exploring other investment opportunities outside of retirement accounts, and ensuring a mix of income sources such as Social Security and potential pensions. By taking a holistic view of retirement savings and actively managing their investments, individuals can better prepare for a financially secure retirement.
While the report paints a mixed picture of the state of 401(k) plans in America, it underscores the ongoing need for increased savings and a more diversified approach to retirement planning. By leveraging the benefits of automatic enrollment, maximizing savings rates, and exploring a range of investment options, individuals can take proactive steps towards a more secure financial future in retirement.