The analysis was performed by Jeanne Thompson, vice president of market insights at Fidelity, who told PLANSPONSOR, “One of the key takeaways is that you don’t have to be making a million to save a million. We wanted to show it can be done and wanted to lay out the path, in case someone wanted to set that as the bar.”
Thompson analyzed more than 5,500 participants with 401(k) assets in excess of $1 million. She specifically studied 401(k) millionaires who made less than $150,000 and tracked behavior over 12 years—from June 30, 2000, through June 30, 2012. The average age of the participants studied was 59, and the median age was 58.6. The average tenure of participants studied was more than 30 years.
“We looked at continuous participants so know we had a record of most of their 401(k) assets,” Thompson explained. “Individuals with shorter tenure may have outside assets.” However, Thompson said, someone does not have to stay with the same employer to save $1 million.
“Many people don’t stay with the same employer for many years. They should just remember, when they do change jobs, not to cash out balances; either roll over to an IRA [individual retirement account] or a retirement plan at a new employer,” she said, adding that the same rules discovered in the analysis apply to seeing retirement grow for those who change jobs.
The analysis found key similarities among 401(k) millionaires who make less than $150,000:
They started saving early—and therefore accumulated significant assets earlier in their career.
- The median balance at the beginning of the period studied was $426,000, and
- The median balance at the end of the period studied was $1.2 million.
They save a large chunk of their pay.
- The average (median) employee deferral rate was 14%, and
- The average annual amount they save is $13,300.
They took full advantage of company contributions—they saved up to the match, and many received profit-sharing contributions.
- The average (median) employer contribution rate was 4.8%, and
- The average (median) employer contribution amount was $4,500.
Young 401(k) millionaires held a high percentage of assets in equities.
- Seventy percent was held in equities, and
- The average (median) annual return was 4.8%.
According to Thompson, one thing that really struck her was that even those up to age 45 were holding a significant proportion of assets in equities.
There are actions plan sponsors can take to help participants on the path to $1 million. Thompson recommends using automatic enrollment to make sure employees participate as soon as they are eligible; utilizing target-date investment funds and, for employees looking for a hands-off customized solution, a managed account; encouraging participants to save enough to get the full company match; and implementing an automatic deferral increase program at 1% per year. For those who get a late start, Thompson said, deferral at a level to get the maximum employer match, increasing deferrals 1% per year, and a healthy allocation to equity are especially helpful.
“Saving for retirement is like running a marathon; you have to be in it for the long haul,” Thompson said. “Much like marathon runners have to do a lot of preparing before the race, individuals must take steps to prepare for retirement, but those who start early will not regret it when they get there.”