You're killing it with your 401(k) – on autopilot

You're killing it with your 401(k) – on autopilot

You're killing it with your 401(k) – on autopilot, Automation, that demon of American job security, may be the patron saint of retirement savings. 

The average balance in a 401(k) defined-contribution account at Fidelity Investments hit a record $95,500 in the first quarter, up more than 9 percent from a year earlier, the company reported this morning. The stock market rally gets a lot of credit, but assets also grew as a record 27 percent of workers in a Fidelity plan increased their contributions, as a percentage of their salaries, over the past 12 months. The combined contributions by employees and employers also hit a record high, at 12. 9 percent.   

Those employees didn't all suddenly wake up and get serious about saving. The increase is also due to a feature some large employers have added to plan designs to bump up savings rates.

Auto-escalation, as it's called, often used in concert with automatic enrollment of new hires into the company 401(k), nudges employee contribution rates up one percentage point a year until they reach a cap. Many employers leave it to workers to opt in to auto-escalation, but 16.1 percent of Fidelity's plans make it automatic on enrollment in a plan. 

"Auto-escalation isn't all that widespread, yet is driving 50 percent of the savings increases" among that 27 percent of workers, said Jeanne Thompson, a senior vice president at Fidelity. "It emphasizes how important auto-enrollment and auto-escalation have been to the retirement system."

It's helping younger workers prepare for old age—sometimes without even realizing it—on the stark American retirement landscape. There, only one-third of workers save in a 401(k) or similar plan (many simply don’t have access to one), and about half of households with people 55 and older have no retirement savings at all, according to the U.S. Government Accountability Office.

Even at companies that offer a plan, only about half of workers sign up for it, and fewer than 40 percent of all employers automatically enroll their employees, according to the Society of Human Resource Management. Generally the default employee contribution is 3 percent of salary, when it should be more than 15 percent, including both your contribution and your employer’s match, according to David Blanchett, Morningstar Inc.’s head of retirement research.

In the first quarter, 68 percent of the rise in savings rates of workers under age 30 was due to automated increases, Fidelity's analysis found. There was a 42 percent rise from a year ago in the number of millennial Individual Retirement Accounts that got contributions, and a 51 percent jump in the amount of contributions.

Overall, IRA balances gained 4.7 percent to reach an average of $98,100. The amount contributed to IRAs rose 38 percent from 2016's first quarter. Some of that jump could be courtesy of profit-sharing payouts, as well as boomers retiring and rolling over money from 401(k)s into IRAs or consolidating multiple 401(k)s into an IRA, Thompson said. Then there is the annual race to contribute to IRAs before the income tax deadline. 

The number of people who contribute to both an IRA and a 401(k) rose by 9 percent, to almost 1.4 million. Among such two-fisted savers, the average combined balance rose to its highest ever: $273,600, a 4.9 percent gain from a year ago. That is likely due to employees switching jobs and moving their assets from a previous employer's 401(k) into an IRA.

Fidelity is seeing more people contribute to both 401(k)s and health savings accounts, or HSAs. That slice of savers grew 21 percent between 2014 and 2016. Health savings accounts tend to accompany high-deductible health-care plans. For people with the cash flow to pay for health care out of pocket, money left to compound in the tax-deferred accounts can serve as stealth retirement savings, since an HSA is triple tax-free: You put pre-tax money into it , your gains compound tax-free, and you can withdraw from it without paying taxes as long as the withdrawals ares used for qualified medical expenses.

Thompson has seen people who retire at 62 or 63 using an HSA to help bridge the gap until they are eligible for Medicare at 65. With retiree medical expenses now at about $260,000 for a couple, according to Fidelity, every bit of savings helps. 

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1. The previous high of 12.8 percent was in the first quarter of 2006. A spike in employer contributions in the first quarter is typical, since any companies that do profit-sharing generally dole out rewards then.
2. Or tax-deductible money if you are not funding an HSA through payroll deductions. 
3. A report by the Plan Sponsor Council of America noted that "a little more than 40 percent of [defined contribution] plans indicate that 25 percent or fewer of their participants use up the entire HSA balance every year and an additional 35 percent of plans state that 26-50 percent of their participants use their entire balance every year." 

To contact the author of this story: Suzanne Woolley in New York at swoolley2@bloomberg.net.  To contact the editor responsible for this story: Peter Jeffrey at pjeffrey@bloomberg.net. 

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