401(k) Participants Saving More

February 14, 2013 (PLANSPONSOR.com) – An analysis of 401(k) plans administered by Fidelity Investments shows the average participant balance increased to another record high by the end of 2012.

The average 401(k) balance hit $77,300 at the end of the year, 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, Fidelity said.  

Participants, on average, save 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% versus 3.1%).   

Fidelity noted that regulations now allow participants to convert money in existing qualified savings plans to a Roth account, should their plan include the investment option (see “The Increased Availability of Roth In-Plan Conversions”). According to Fidelity, 37% of workplace retirement plans offer a Roth savings option, up from 12% five years ago. Of these plans, 12% offer the Roth in-plan conversion option.   

Younger investors tend to utilize Roth the most. One-in-10 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, Fidelity noted.   

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 pre-tax savings option. When factoring in employer contributions, Roth participants show a total savings rate of 15.3%, Fidelity data shows.