Even though 401(k) participants are increasingly leveraging target date funds to keep their asset allocations on track, a new analysis by Fidelity suggests that many had stock allocations higher than those recommended for their age group.
As part of its 3Q 2019 analysis of retirement trends, Fidelity Investments compared average asset allocations to an age-based TDF and found nearly a quarter (23%) of 401(k) savers still have a higher percentage of equities than recommended, including 7% who are 100% invested in equity.
Among Baby Boomers, Fidelity notes that the overallocation of stock was even higher, with 37.6% having too much equity, including nearly 8% who are in 100% equities. This is in addition to the 5% of Boomers who have zero exposure to equities in their 401(k).
Fidelity’s analysis also found asset allocation among workers saving in 403(b)/tax exempt accounts were slightly more on target. As of the third quarter, 81% have the suggested level of stock allocations recommended for their age group, while only 11% were considered to have stock allocations higher than those recommended for their age group.
For purposes of these findings, the firm uses its Fidelity Equity Glide Path, which provides a range of equity allocations it considers appropriate for those planning to retire around ages 65 to 67. Designed to become more conservative, the glide path begins with 90% equity holdings within a retirement portfolio at age 25 continuing down to 19% equity holdings 10-19 years after retirement.
Kevin Barry, president of Workplace Investing at Fidelity Investment, observes that, “While the market’s performance over the last few years has had a positive effect on many retirement account balances, it may have also contributed to some individuals having more stock than is recommended.”
Overall, Fidelity found that as of the third quarter, 53% of 401(k) savers kept all their savings in a TDF, while 66% of workers saving in a 403(b)/tax exempt account kept all their savings in a TDF. Among Millennials, 70% are 100% invested in a TDF, in part due to being auto-enrolled in their 401(k).
Rise and Fall
Additional findings from Fidelity’s analysis show that market conditions in the third quarter caused average account balances to dip slightly after reaching near-record levels the previous quarter.
Based on an analysis of 23,000 corporate DC plans and 17.4 million participants as of Sept. 30, 2019, the average 401(k) balance fell to $105,200, which was less than a 1% decrease from $106,000 in the second quarter. Similarly, the year-over-year average balance is down just over 1% from a record high balance of $106,500 in the 3Q 2018. Consider also that the average 401(k) balance in the 3Q 2009 was only $59,100.
The average 403(b)/tax exempt account balance dipped to $88,000, less than a 1% decrease from last quarter but up slightly from 3Q 2018 balance of $87,500.
Long-term savers, however, saw their balances increase to record levels in Q3. Among participants who have been in their 401(k) plan for 10 years straight, the average balance reached a record $306,500, topping the previous high of $306,000 from 3Q 2018. For comparison, the average balance of Boomers was $366,100, while Gen Xers stood at $281,000 and Millennials at $137,300.
Among workers saving in a 403(b)/tax exempt account, the 10-year continuous balance reached $179,000, more than four times the average balance for this group in 3Q 2009, Fidelity notes.
Contributions and Roth 401(k)s
Contribution are also on the rise. As of the 3Q, the average DC plan total savings rate – including both employer and employee contributions – reached 13.4%, up from 11.8% in 2009. What’s more, of those employers offering auto-enrollment, a record 47% are now auto-enrolling employees at 4% or higher, up from 29% five years earlier.
Fidelity’s analysis also shows that more savers are taking advantage of the after-tax benefits of Roth 401(k)s. In just the last five years, the percent of plans offering Roth 401(k)s has increased by 60%, from 48.4% in 2014 to more than 70% as of 3Q 2019.
Moreover, the number of workers contributing to them crossed the one million mark to 1.02 million in 3Q — a nearly tenfold increase from the 109,000 workers who contributed to a Roth 401(k) in 3Q 2009. And they are on the younger side, with nearly half (485,000) of those Roth 401(k) contributors being comprised of Millennials.
