Employees are doing enough amazing work in their saving for retirement. In that same quarter, the average 401(k) deferral rate reached an all-time record high! According to Mike Shamrell, vice president of thought leadership for Fidelity’s Workplace Investing, employees deferred an impressive 9.5% into their 401(k) plans during this period. Businesses benefited, too, contributing large amounts—4.8% of their employees’ salaries on average—to their employees’ retirement savings.
The overall savings rate, employer contributions plus employee deferrals, bounced back to 14.3%. This figure is right in line with Fidelity’s 15% target recommendation. This new target is an important step in making sure that Americans can maintain their way of life into retirement. Fidelity recommends that workers should save at least 15 times your pre-tax income by the end of your career. This total needs to factor in any employer contributions, too.
Fidelity’s most recent quarterly analysis covered 25,300 corporate plans covering 24.4 million participants. In addition, the data suggested big increases in employee payments, too. This growth was a result of largely auto-escalations, which automatically escalate savings rates over time to keep pace with salary growth. For context, about two-thirds of the increase in deferrals over the quarter is due to this feature.
Shamrell emphasized the importance of maximizing employer matching contributions, stating that employees should “defer at least enough to get the employer’s full 401(k) matching contribution.” Employer matching is most often 100% of the first 3% employees put in. That’s not all—they also match 50 cents on the dollar on the next 2% of contributions.
Larry Luxenberg, founder of Lexington Avenue Capital Management, offered a valuable perspective. He noted the unfortunate truth that there’s no universal “magic rate of savings” for 401(k)s. He highlighted the enduring value of employer contributions, saying, “That’s the case before and after retirement.”
Such clear improvements from employees and employers alike echo an increasing recognition of the importance of retirement saving.
“This probably [is] the closest thing a lot of people are going to get to free money in their life.” – Mike Shamrell