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Retirement Account Contributions Held Steady in Q3: Fidelity

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Fidelity Investments’ quarterly analysis of retirement savings trends shows that average retirement account balances increased slightly in the third quarter despite economic uncertainty and market swings.

And although contributions to retirement accounts held steady overall, the financial challenges attendant on the coronavirus pandemic drove retirement account withdrawals under the CARES Act for those employees with an immediate financial need.

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“It’s encouraging to see average account balances increase slightly over the quarter and many individuals continuing to save in the face of the challenges posed by the pandemic, especially as many organizations, as well as their workers, are struggling in the current business environment,” Kevin Barry, president of Workplace Investing at Fidelity Investments, said in a statement.

“While the goal for retirement is to save and invest for the long-term, unexpected events can create a need to withdraw savings to cover near-term expenses.”

Fidelity’s analysis showed that retirement accounts increased slightly in the July-to-September period. The average IRA balance stood at $117,700, up 6% from the second quarter and 7% higher than the average balance a year ago of $110,200.

Likewise for average 401(k) and 403(b) balances:

  • 401(k): $109,600, up 5% from Q2 and 4% from a year ago
  • 403(b): $96,100, up 5% from Q2 and up 9% from a year ago

Employee and employer contributions remained steady, according to the analysis. The total savings rates for 401(k) and 403(b) accounts, which is the combined employer and employee contribution rate, remained consistent from the previous quarter.

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The average total savings rate for 403(b) accounts was 10.6%, and for 401(k) accounts 13.5%. Across Fidelity’s 401(k) platform, 89% of individuals left their contribution rate unchanged.

In the third quarter, investors across all generations continued to leverage Roth IRAs as a retirement savings vehicle, Fidelity reported. Year over year, 58% of all IRA contributions were to Roth IRAs, an increase of 54%.

Overall, the number of Roth IRAs that received a contribution grew by 35% over the past year. Total IRA contribution dollars, across all types of IRAs, increased by 37% during the same period.

According to the analysis, more individuals are saving in both an IRA and a 401(k). Upward of 2 million individuals on Fidelity’s platform save in both vehicles, an increase of 12.5% over third quarter 2019.

Among individuals saving in both their 401(k) and an IRA, the average combined balance rose to $333,700, an increase of 6% over the average balance of $312,000 a year ago. Millennials who save in both saw their average balance increase by 15.8% to $82,600.

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Fidelity’s report said workers continued to rely on the CARES Act to help meet financial needs. From March when the law was signed to the end of the third quarter, 1.2 million individuals on the platform took a CARES Act distribution from their retirement account.

In the third quarter, the overall average withdrawal amount was $9,000, while the median withdrawal amount was $2,400.

Since many employees who needed to tap their retirement savings opted for a CARES Act withdrawal, the percentage of workers who initiated a traditional 401(k) loan dropped to 1.9% in the third quarter.

Importance of Asset Allocation

The continuing financial uncertainty in the third quarter, marked by big stock market gyrations, has emphasized the importance of investors — especially baby boomers nearing retirement — having a plan for their savings, Fidelity said.

The third-quarter analysis identified areas for older workers to examine to ensure they are considering all the options available to manage and protect their retirement savings.

Asset allocation. A proper balance of stocks, bonds and cash within a retirement savings account can play a key role in helping individuals meet their retirement savings goals, according to Fidelity.

However, as of the third quarter, 38% of boomers may have stock allocations in their 401(k)s that are higher than suggested for their age group, with 7% holding 100% equity in their 401(k) plans, potentially exposing their savings to unnecessary risk.

On a more encouraging note, Fidelity said, some boomers were mixing up the amount of stocks in their portfolios, with 15% making an exchange within their 401(k) over the last 12 months and 32% moving some of their savings into more conservative investments.

In addition, the analysis showed that 70% of boomers use a target date fund within their 401(k); however, only 39% hold all of their savings in a target date fund, and so may not fully benefit from their rebalancing capabilities.

More help for those who need it. Workplace managed accounts can help savers build a personalized plan and manage the asset allocation and overall level of risk in their retirement account through professional investment management, according to Fidelity.

As of the third quarter, 34% of 401(k) plans offered a workplace managed account option, along with 37% of 403(b) plans. However, although 50% of boomers on Fidelity’s 401(k) platform have access to a workplace managed account, only 8% of them use this service.

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