There’s good news and bad in the latest Fidelity release of the 401(k) balances it oversees. Largely thought of as a bellwether for the 401(k) industry as a whole due to the number of accounts held at the Boston-based investment behemoth, the company reports the average balance had increased to another record high at the end of 2012.
Which would be great news if the average were significantly higher than the $77,300 Fidelity reports, considered low by retirement standards. It’s up from $69,100 one year earlier, an increase of 12%. The fourth-quarter average balance tops the previous quarter’s high of $75,900. About two-thirds of the 2012 increase was attributable to market action while one-third was due to participant contributions.
Participants on average saved 3% to 8% of their annual salaries in their 401(k) plans. When the typical employer contribution is factored in, be it a match or profit sharing, the average participant’s total savings rate increases to 12%. In addition, for a 15th straight quarter, more participants increased their savings rate than decreased it (5.8% vs. 3.1%).
The company also reports that “recent legislative provisions have raised awareness of Roth 401(k) opportunities for workplace participants, such as tax-free growth potential and tax-free withdrawals for them and their heirs.”
Regulations now allow participants to convert money in existing qualified savings plans to a Roth account, should their plan include the investment option. Today, 37% of workplace retirement plans offer a Roth savings option, up from 12% five years ago. Of these plans, 12% of them offer the Roth in-plan conversion option.
Younger investors tend to utilize Roth the most. Ten percent of participants in their 20s contribute to this option, versus 6% overall. These individuals may be well-positioned to benefit from Roth due to their long investment horizon and the likelihood they will be in a higher tax bracket upon retirement.
Roth contributors also boast a higher savings rate, deferring an average of 11%. Nearly six out of 10 (59%) of these participants utilize a tax diversification strategy by saving a portion in a post-tax Roth 401(k) as well as a pretax savings option. When factoring in employer contributions, Roth participants show a total savings rate of 15.3%, more than 3 percentage points higher than the overall average.