The data is in: 401(k) savings have hit record levels. Profit-sharing and 401(k) plans enjoyed more participation than ever before–all despite the negative impact of the COVID-19 pandemic. The reason? The impact of a government program leads to higher contributions, even if the saver isn’t always aware of it. A financial advisor could help you plan for retirement and help you select investments that align with your financial goals.
401(k) Default Rates Are Rising
The Plan Sponsor Council of America (PSCA) recently released its 64th Annual Survey data, which indicates that 401(k) savings plans have reached record levels of inflows. More than 90% of eligible workers contributed to retirement funds over the past year.
Coronavirus relief has partially helped to offset pandemic-related financial stresses, allowing more workers to keep money flowing into their retirement funds. But most importantly, according to the PSCA’s survey, the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019 has finally begun showing an impact.
The SECURE Act included many provisions designed to increase access and use of employer-sponsored retirement plans: greater transparency, higher contribution limits and new incentives to encourage greater employer participation, and it shows.
“When people have access to retirement savings plans at work, they use them,” said PSCA Research and Communications Director Hattie Greenan. “Expanding access to plans as the SECURE Act did is clearly creating more retirement savers.”
Nearly three-fourths of both salaried and hourly part-time employees are now allowed to contribute to these plans, and since the SECURE Act increased the Qualified Default Investment Alternative (QDIA) cap up to 15%, more than a third of all plans now have an auto-escalation cap greater than 10% of pay. This helps employees already enrolled in plans to further boost their participation levels. Default contribution rates are also higher, helping new enrollees save faster. The most common default contribution rate is now 6% of pay, with more than two-thirds of plans defaulting to a rate of more than 3%.
The survey found that selecting a higher default rate impacted employee savings rates more significantly than raising matching contributions; since higher-income participants tended to increase their contribution rates to take advantage of employer matches and lower-income participants did not this often resulted in a wider savings gap. Instead, increasing the default rate has increased savings across the board.
What an Increased 401(k) Balance Means For You
Greater retirement plan contributions will help increase your retirement savings over time, but it also means that more money will be taken from your pay. Experts generally recommend contributing 10% to 15% of your salary towards retirement, and with default rates increasing, even individuals with little financial knowledge can now feel more confident in their retirement savings.
Retirement planning can be complicated, however. Government policies can help encourage higher fund contributions, but there is no one-size-fits-all strategy. Although retirement fund managers should and do manage plans for the benefit of their contributors, they may benefit from commissions and increased inflows to their managed funds. So it is important to review your portfolio frequently and choose funds that align with your long-term financial plans.
Higher default contribution rates and increased participation have led to record inflows to profit-sharing and 401(k) savings plans. This may benefit your employer and your plan administrator, but in the end, you benefit most of all: more money put away early on leads to greater retirement savings when you need it.
Retirement Planning Tips
- Not sure which investment strategy will help you retire early? For a solid, long-term financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free retirement calculator to get a good estimate of how much money you’ll need in order to retire.
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