Did you doze off during employee orientation and need to re-learn a thing or two about 401(k)’s?
Don’t worry, you’re not the first, nor the last! We’ll help you get a refresher on defined-contribution plans and show you some sobering 401(k) statistics that will wake you right up into saving!
Employers have increasingly handed the burden of retirement planning off to their employees in the form of 401(k)’s, and traditional pensions are starting to become a collectors item it seems. What does this mean for you?
It means there’s never been a better time to be as informed as possible. So, have a look at these 401(k) stats and facts first, before formulating your savings strategy. However, there’s much more to 401(k) contributions, but this is a good starting point.
How much can you contribute to a 401(k) in 2021: Perhaps you’re only here to find out what your 401(k) maximum contribution limit is for 2021. Not a problem. If you’re under 50 the maximum you can contribute is $19,500. If you’re aged 50 or older, you can contribute up to $26,000.
Note on mean vs. median: When a median value is significantly less than the mean (a.k.a average), it means a large number of people have less than the average, and so the median is a better gauge of who has what when it comes to money and income.
Let’s start with some fascinating 401(k) stats:
- There were about 600,000 401(k) plans in the U.S. in 2020.
- The average 401k balance was $123,900 in 2021.
- Total 401(k) savings rate was 13.8% at the end of Q1 2021.
- 44% of participants used their loan/withdrawal to pay off debt.
- 14% of participants elected the Roth 401(k) plan option when offered.
- Only 21% of US workers max out their 401k plan.
With Automatic Enrollment (AE) an increasing number of American workers are being auto-enrolled in a 401(k). And considering the 401(k) stats before this approach were significantly low, especially among low income earners, these employee sponsored retirement plans should continue to flourish. Let’s find out more!
What is a 401(k) plan?
Named after a section of the U.S. Internal Revenue Code, a 401(k) is a retirement savings and investing plan that employers offer to their employees. It offers employees a tax break on money they contribute.
At the same time, the company offering the plan can match some, or all, of an employee’s contributions. Meaning they can choose to deposit into your account a set percent/amount for every dollar you contribute. In other words, it’s basically ‘free’ retirement money for you, take advantage of it!
For example, a 50% company match would be $100, on a $200 monthly 401(k) contribution.
What are the most common types of 401(k) plans?
There are two basic types of 401(k) plans, the traditional and the Roth 401(k). And if you’re split between a Roth and Traditional 401(k), know that the main difference is in how they are taxed.
Your traditional 401(k) investment earnings are not taxed until you withdraw the money. Whereas with a Roth 401(k) plan, your withdrawals can be tax-free.
What happens if you contribute too much to a 401(k)?
Firstly, should you max out 401(k) plans? Do you even know how to max out a 401(k)? Generally speaking, you should definitely max out your 401(k). Especially if your employer offers a good match, but you’re doing something great regardless. And that’s putting money away for retirement!
Now, if you get a little too excited and over contribute, the worst case scenario is that you get taxed twice on the amount above the maximum contribution limit. And that limit for 2021 is $19,500 ($26,000 if you’re aged 50 or older).
The key is to get it all taken care of before the tax filing deadline of April 15th. To avoid the double-tax, contact your plan administrator and tell them you’ve made “excess deferral“, they are required to return the excess funds to you as a “corrective distribution“.
Over contributing can happen for a number of reasons, but the best way to prevent it is to remember that the contribution limit is per individual basis and not per plan. So, if you’ve switched employers, or working two jobs with two plans, the max amount is still tied to you as an individual.
How to invest in your 401(k)?
As an employee and an owner of a defined-contribution plan, you are responsible for ‘defining’ how much of your income to contribute on a monthly basis, and where to invest the money.
The good news is that 401(k)’s are easier to invest in than ever, with most employers offering easy to navigate dashboards where you can select how much and where with a few clicks of the mouse.
A typical choice offered to modern-day employees are target-date funds. Which basically require you to select when you plan to retire and then funnel the money into an appropriately composed portfolio for that risk range.
The portfolio typically includes a mixture of stocks and bonds, with the proportion of each increasing/decreasing as you age. Typically, the younger you are the more you can expect stocks to be the dominant portion, and the older you are the more you can expect your bond portfolio portion to increase.
But what if your employer doesn’t offer 401(k)?
If your company doesn’t offer a 401(k) plan, don’t worry you can still save and invest for your future. Albeit your contributions won’t be matched by a company, but it’s better than the alternative of not saving at all. Some 401(k) alternatives include IRA’s, SEP IRAs, SIMPLE IRAs, as well as stock options.
You can’t have a 401(k) without an employer, thus one of your main 401(k) alternatives in this case is opening up your own Individual Retirement Account (IRA), whether a Traditional or Roth.
But what’s the difference between an IRA and a 401k? Without getting too detailed, a 401(k) is tied to an employer, but anyone can open an IRA. Also, IRA’s will allow you to stash away up to $6,000 per year either in pre-tax (Traditional) or after-tax (Roth) income. A significantly lower amount than that of the 401(k)’s $19,500 limit for those under 50 years old as of 2021.
Should I rollover my 401(k)?
But what happens when you change jobs? Your former employer is certainly not going to keep matching your previous contributions. Do you cash out after leaving? How do you even cash out a 401(k) after quitting? Well, the good thing is that you have several options as to what to do.
You can either:
- cash out your 401(k),
- leave it where it is,
- transfer it over to your new employer’s 401(k) (if available),
- or, roll it over into an Individual Retirement Account (IRA).
You probably won’t want to cash it out, as the taxes and fees will make you want to cry. Thus, if your new employer doesn’t offer a 401(k), rolling your 401(k) over into an IRA may be your best bet.
And it may open you up to more investment choices, fewer rules, more estate planning advantages, better communication, and among other things, lower fees.
How many Americans have 401(k)s?
More specifically, what percentage of U.S. workers have 401(k) plans? According to the Investment Company Institute (ICI), there were about 600,000 401(k) plans in 2020. With about 60 million active participants, and millions more composed of former employees and retirees.
As of 2021, about 66 percent of the assets held by 401(k) plans were held in mutual funds.
What is the average 401(k) balance by age?
Below are the average and median account balances for 401(k) owning Americans as reported in the How America Saves 2021 publication by Vanguard. They gathered data from 4.7 million 401(k) participants, across their book of business.
|Age||Average Balance||Median Balance|
|25 to 34||$33,272||$13,265|
|35 to 44||$86,582||$32,664|
|45 to 54||$161,079||$56,722|
|55 to 64||$232,379||$84,714|
If you’re under the age of 25, as you can see by looking at the table above, investing diligently in your 20’s will put you ahead of the game.
What are some 401(k) stats and facts to be aware of?
1. The average 401k balance was $123,900 in 2021
After taking a serious tumble during the COVID outbreak of 2020, retirement plans sprung back to reach new all-time highs. As of April 2021, the average 401(k) reached $123,900 while the average IRA balance went up to $130,000.
Additionally, the number of American retirement savers with $1 million dollars or more in their 401(k) or IRA plans is at an all time high. All this despite the economic uncertainties of 2020.
2. 7.5% of participants contributing to their 401(k) plan decreased their deferrals during Q1 2021
Despite the economic uncertainty and the overall unprecedented times, very few employers and employees decided to contribute less. With the percent of participants decreasing their deferrals going from 9.4% in Q1 2020 to 7.5% in Q1 2021. Them majority (66%) of deferral increases in Q1 2021 were a result of Auto Increase Programs.
3. The total 401(k) savings rate was 13.8% at the end of Q1 2021
(Source: Fidelity )
This rate combines the employee contributions and the employer’s 401(k) match. Ten years ago it was at 12.2% and has steadily been on the incline for most of the decade. It was at 13.5% in 2019.
4. 401(k) participation among Millennials has increased by 46% over the last 10 years
Defined contribution plan participation has been on the up in the past decade overall. Many attribute this growth to the rise of Auto Enrollment (AE) adoption by employers.
Which basically automatically enrolls a new employee into a 401(k) plan upon joining the company. And it’s working, because a whopping 91% of employees who are auto enrolled don’t opt out!
5. 401k plans held around $6.9 trillion in assets as of Q1 2021
This is almost 20% of the total U.S. retirement market, which was at $35.4 trillion. And to illustrate the growth of 401(k) usage, consider that in 2011 401(k) assets were at $3.1 trillion and represented 17% of the U.S. retirement market.
Also, as mentioned earlier in this article, 66% of the 401(k) investments are in mutual funds.
6. The percentage of workers with an outstanding 401(k) loan dropped to 17.5% in Q1 2021
Despite many American workers facing financial hardships, something counter-intuitive is taking place, 401(k) loans and withdrawals have decreased; in Q1 2020 this figure was at 19.7%.
Additionally, only 1.6% of 401(k) savers sought a new 401(k) loan in Q1 2021, which was about the same percentage as in Q4 2020, but down from 2.4% just one year ago.
Furthermore, the amount of workers who withdrew money from their accounts, including hardship withdrawals, fell to 2.4% in Q1 2021 versus the 6.1% figure in Q4 2020 and 3.0% a year ago.
7. 44% of participants used their loan/withdrawal to pay off debt
Most of the people who withdraw early report needing the money right away, with 59% of those who initiate a withdrawal using the funds within a week of receiving them.
The majority use the funds to pay off debt such as credit cards, outstanding bills, medical expenses, mortgage, living expenses. And some are even using 401(k) to pay off student loans.
Another 37% reported they used their most recent 401(k) loan or withdrawal for home expenses such as using 401k for down payment on a house (under the first time home buyer clause).
While others used the funds to refinance an already purchased home, make home improvements, and/or pay down or pay off their mortgage.
8. 60% of participants said they’d rather borrow from themselves than others
Aside from not having an emergency fund to call upon, many 401(k) or 403(b) participants chose to borrow funds from themselves versus from another lender. Here are some of the top answers as to why American’s decided to take out 401(k) or 403(b) loans/withdrawals:
- I would rather borrow from myself than from others: 60%
- The interest rate was lower than borrowing from other sources: 41%
- I had no other savings to tap into: 36%
- It was a convenient way to get money: 36%
- I didn’t want to take a withdrawal from my 401k or 403b: 21%
- I didn’t want to take a loan from my 401k or 403b: 18%
- My household experienced a loss of income: 15%
- I couldn’t borrow from banks due to my credit status: 10%
- Other sources such as home-equity or credit card were unavailable or maxed out: 9%
- Some other reason: 8%
Some of the reasons listed under the household experiencing a loss of income included: furloughing, loss of side work, illness, etc.
9. 14% of participants elected the Roth 401(k) plan option
As of the beginning of 2021, 74% of Vanguards plans had adopted the Roth 401(k) option, and 14% of participants decided to opt in.
And there is anticipated growth in Roth adoption rates due to it’s tax diversification benefits. But automatic enrollments still default to traditional 401(k)’s with pre-tax savings for the time being.
10. Participation rates among men (79%) and women (78%) are about the same, but average and medians differ
The average 401(k) balance for men was $131,045 with a median of $34,246. While the average 401(k) balance for women was $88,393 with a median of $22,434.
401(k) participation rates can vary significantly when broken down into employee demographics. And while there doesn’t seem to be a significant difference between men and women, the difference is very considerable when it comes to income ranges.
In 2020, of those making under $30,000 per year, roughly 56% participated in a defined contribution plan, versus 95% of those making over $150,000 per year.
And it seems that this figure would be even worse if it weren’t for Automatic Enrollment (AE), because only 36% of those making under $30,000 elected a plan voluntarily, versus 90% of those making over $150,000.
11. 67% of private industry workers in the U.S. had access to retirement plans in 2020
(Source: U.S. Bureau of Labor Statistics)
Two-thirds of Americans had access to some type of employer-provided retirement plans as of March 2020. Additionally, 52% had access to defined contribution plans like 401(k)’s, while 12% had access to both a pension plan and a defined contribution plan.
Just 3% of workers had access to defined benefit plans only. A figure which is comprised predominantly of union workers due to the way union memberships are structured. And among union workers 91% had access to a retirement plan, versus 65% of non-union workers.
12. Only 21% of US workers max out their 401k plan
(Source: Personal Capital Survey)
Should you max out your 401(k) contribution? In an ideal world you certainly would, and all else being equal you’d enter your golden retirement years in tip-top shop. But we don’t live in an ideal world, and there’s also a few situation specific counter-arguments for not maxing out a 401(k).
And in a recent survey done by Personal Capital, only about 50% of Americans with 401(k) plans reported contributing to their plans from each paycheck, period.
Just 1-in-5 (21%) said they max out their 401(k) plans on an annual basis, and just under half (49.5%) report receiving the maximum match from their employer.
13. For workers under 50 years old the max combined employer + employee contribution cannot exceed $58,000 in 2021
Increasing by $1,000 from the $57,000 figure in 2020, the total annual contributions in 2021 cannot exceed the lesser of:
- 100% of the participant’s compensation, or
- $58,000 ($64,500 if you’re aged 50 and over).
Keep in mind, your individual annual maximum is separate from the amount your company pays under the ‘company match’. The figure above refers to combining the two to achieve the total annual contribution.
14. 401(k) expense ratios range from 0.3% to 2% on average
(Source: DOL, Pew Research)
According to a recent Pew Charitable Trust survey, just 19% of small to medium sized business owners were ‘very familiar’ with the fees being paid by their 401(k) plans. Another 34% expressed not being familiar at all, and 47% reported being ‘somewhat familiar’.
Yet the majority of small businesses pay these fees, in order to offer 401(k) benefits to existing employees as well as to be able to attract new labor. If you’re a small business owner offering a 401(k) plan, you may want to look at provider’s 408b-2 fee disclosure to find out what you’re actually paying!
15. The average 401(k) balance for those aged 65 and up is $216,720, while the median is $64,548
While the average balance for those aged 25 to 34 is $26,839 and the median of $10,402. And the average for those 35 to 44 is $72,578 with a median of $26,188.
16. The agriculture, mining, construction industry has the highest 401(k) average and median balances
At an average 401(k) balance of $161,065 and a median of $39,869, the agriculture, mining, construction industry sits at top of the ‘average 401(k) balance by industry’ table.
In fact, let’s look at the rest of that table, shall we?
Average 401(k) balance by industry:
|Industry||Average Balance||Median Balance|
|Agriculture, mining, construction||$161,065||$39,869|
|Finance, insurance, real estate||$128,864||$33,390|
|Business, professional, non-profit||$127,647||$28,830|
|Transportation, utilities, communications||$95,476||$23,518|
|Media, entertainment, leisure||$88,636||$23,924|
|Education and health||$81,374||$19,589|
If you’re in the wholesale and retail industry and your savings are north of these figures, you’re doing something right and should share it with the rest of us!
17. The number of people investing into both 401(k) and IRA plans is increasing according to 401(k) statistics
According to Fidelity, more and more people are choosing to invest in both an Individual Retirement Account in addition to a 401(k) offered by their employers.
In fact as of 2021, more than 2 million individuals on the Fidelity platform are actively contributing to both retirement plans, a 12.5% increase since Q3 of 2019. We hope the trend continues!
Why are people saving more? Are these Hashtag Income articles on the captivating average American savings statistics finally having an impact on people? We sure hope so!
What are some things to know about 401(k) withdrawals?
Now, life never goes quite as planned, does it? And sometimes you have no other choice but to pull some of that hard earned and smartly saved money out.
Maybe you want to use your 401(k) to buy a house? Or maybe you won’t make it 6 months without pulling some money out for living expenses. Whatever the case, let’s look at some of the things you need to know when taking money out of a 401(k) early.
Generally, the early withdrawals fall into one of these three common categories:
It must meet both of these criteria to qualify. First, you’re taking the money out because of an immediate and heavy financial need. Second, the amount you’re taking out however will be limited to the amount you’ll need to resolve that need. (FYI: Buying a boat is not an immediate or heavy financial need.)
These distributions are:
- Subject to income taxes (unless they consist of Roth contributions).
- May also be subject to 10% additional tax for early distributions
Once you take out a hardship distribution, you can’t pay it back to the plan, nor can you roll it over to another plan or an IRA account.
Taking money our before you turn 59.5 or whichever age the plans retirement specifies, if earlier. Not every employer will allow early withdrawals, so you would have to check in advance.
Also if you find yourself in a such a situation and you’ve absolutely exhausted all other options, be sure to read the fine print as to what type of early withdrawals are allowed.
These distributions are typically:
- Subject to normal income taxes (unless they consist of Roth contributions).
- Subject to 10% tax penalty if you are under the age of 59 1/2 as of 2021
If your 401(k) plan offers loans and you’re in absolute need of such a thing, it may be a better option than the two listed above. Because in lieu of losing a significant portion of your investment account forever (via withdrawal), a loan is . . . just that, a loan. You get to pay it back.
Typically the loan will be paid back by through paycheck deductions. And no one likes to see their paycheck numbers decrease, so once again, don’t mess with your 401(k) funds if you must not.
But can you withdraw from a 401(k) early without a penalty?
Yes, you can. But only for certain well defined reasons/exceptions. Also these all depend strongly on your 401(k) administrator, so be very careful before jumping the gun without verifying first.
FAQs about 401k’s
What is a good rate of return on 401k?
It’s not possible to predict your rate of return for your 401(k). It really does depend on so many factors and configurations. But if you’re looking for a generic answer, here it is:
With a moderately aggressive portfolio allocation (about 60% stocks and 40% fixed-income and cash), a good 401(k) average annual rate of return would be in the 5% to 8% range.
What is the average 401k loan interest rate?
(Source: Debt.org, Commerce Bank)
The rate for these type of loans usually sits a point or two above the prime rate. As of July 2021 the prime rate is at 3.25%, so a 401(k) loan would be in the range of 4.25% and 5.25%.
Now, here’s the kicker. The interest rate is the same regardless of your credit score. And it’s also why 60% of 401(k) participants who took out loans listed the reason as, “I’d rather borrow from myself than someone else.”
How much should I have in my 401k?
Yet another ‘it depends’ question. We’ll answer it with the ‘rule of thumb’ answer.
But first, right off the bat, let’s exclude those under the age of 30, because there is a lot going on in their lives and as 401(k) statistics tend to show, there isn’t much saving going on in this age-range.
Now, the rule of thumb is, starting at the age of 30 and onward, you should add one year of salary for every five years going forward.
Thus, if your salary is $60,000, you should theoretically have this much in savings:
- age 30: $60,000
- age 35: $120,000
- age 40: $180,000
- age 45: $240,000
- age 50: $300,000
- age 55: $360,000
- age 60: $400,000
- and so on.
Again, this is just a rule of thumb and each person’s circumstances are different.
What is the average 401k balance at age 60?
The average 401(k) balance for the age group 60-69 is $182,100, with a contribution rate (% of income) of 11%.
Note on the numbers used in the article: In an effort to paint a fuller picture, the figures in this article were aggregated from numerous credible sources, who reported the results of their surveys at various points in time.
We hope these 401(k) statistics have provided you with a solid foundation on what these plans offer, and where you stand in terms of national averages.
Take advantage of your 401(k) plan and your employers matching contribution. Max it out if you can and if it makes sense for you; especially if your employer matches a high percentage!
Invest as much as you can, let compound interest do the work and your future self will thank you.
ICI.org | Vanguard: How America Saves 2021 | Fidelity: Building Financial Futures | U.S. Bureau of Labor Statistics | Personal Capital Survey | IRS.gov | Department of Labor | Pew Research Survey | Debt.org |