A little good news on the retirement savings front – a recent report from Fidelity Investments shows that people are saving more money for retirement and setting up more retirement accounts, with fewer savers borrowing from their funds. It’s an encouraging sign in the constant challenge for retirement security.
The average balance in Fidelity-administered 401(k) plans jumped by $4,300 to $92,500 at the end of 2016 from 2015 figures, while the average balance of Fidelity-administered IRAs stood at $93,700, up $3,600 from prior year levels. The increases could be attributed mainly to the rising stock market and growing economy, improved employment rate and stronger property values, says Fidelity.
Also helping the increase - higher employee contribution rates, which recovered to pre-financial-crisis levels. The average contribution rate to Fidelity 401(k)s reached 8.4% in the fourth quarter, the highest level in more than eight years. Granted, it’s still off from the 10-15% that is often recommended as a target for annual savings, but the improvement is a step forward. Over the past 12 months, employee contributions plus employer match added a record $10,200 to the typical account.
On another positive note, participants borrowing from their 401(k) plans have fallen. Outstanding loan balances have dropped to 21%, the lowest level in seven years, according to Fidelity. They credit employer recognition of the ill effects plan loans can have on retirement savings, which has resulted in tighter restrictions on a participant’s ability to borrow from their account.
Fewer loans may be the healthiest development. A 401(k) loan should be a last resort. Many of these loans never get repaid. That's because borrowers often leave the company and don't have the cash to repay, so the loan is then treated as a taxable distribution. This “leakage” from tax-advantaged savings not only incurs possible tax and penalties but also results in lost portfolio growth that threatens to leave many savers far behind their retirement goals.