The real reason 401(k) balances have soared during the pandemic

The real reason 401(k) balances have soared during the pandemic

dc plan posts pandemic

dc plan posts pandemic

The COVID-19 pandemic has changed the world in more ways than most people can count, from the way children go to school to how restaurants work. A change that might not have been easy to predict — the pandemic has led to more money in defined contribution plans like 401(k) plans, according to a new study by Alight. There are myriad reasons for this, including the fact that government stimulus checks sent out in 2020 and 2021 may have helped fewer people borrow from their retirement accounts. Saving enough money while you work — and investing it effectively — is the key to a successful retirement. If you need help getting there, consider working with a financial advisor.

Trends in defined contribution plans

A number of statistics show the general trend of more money being held in retirement accounts during the course of the pandemic than in previous years.

First, the average DC plan balance in 2020 increased 7% year over year from $122,150 to $130,330. Not only is that a year-over-year increase, it’s also the highest average planned balance ever. This was accomplished despite the fact that the pandemic has caused significant volatility in the stock market, in which a significant amount of 401(k) funds are invested. That said, the median budget balance actually declined somewhat, from $29,430 to $28,426 – possibly indicating that the median increase was heavily influenced by some higher quality accounts.

The average plan contributions also rose slightly from 8.1% to 8.3%.

Perhaps the most revealing statistic is how many eligible participants have participated in the defined contribution plans offered by their company. The average participation rate was 83%, but more than half of the plans have at least 90% of their potential participants enrolled in the plan, while only 10% of the plans have a participation rate of less than 50%.

One of the biggest challenges in closing the retirement savings gap that currently exists in America is getting people to actually start saving by enrolling in the plans to which they have access. More and more plans are transitioning to automatic enrollment — which means new hires at a company that offers a 401(k) must opt ​​out of enrolling in a plan rather than opting in. The average participation rate for workers ages 20-29 was 86%. Without them it was only 50%.

401(k) loans during the pandemic

dc plan posts pandemic

dc plan posts pandemic

Borrowing money from your 401(k) account is not a decision to be taken lightly. It means using money that you would have set aside for your future to solve a more short-term problem. Sometimes it’s the only option available, but it still has some downsides, namely a 10% prepayment penalty on top of the taxes you have to pay.

During the pandemic, a special law was enacted that makes it easier to withdraw early without having to take out a loan. Because of this, the total number of loans fell from 11% to 7%. This may end up being an outlier rather than the start of a trend as the special rules apply to the end of the pandemic.

The number of plan participants with an outstanding loan also fell from 24% to 22%.

The final result

dc plan posts pandemic

dc plan posts pandemic

The COVID-19 pandemic, which impacted so many lives in 2020 and 2021 (and in some cases up to now), also changed the way Americans save for retirement. Average account balances in 2020 were higher than any year before. Additionally, fewer people have had to borrow, in part due to regulations making it easier to take early withdrawals without tax penalties.

Retirement tips

  • To get the most out of your retirement savings, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool puts you in touch with up to three financial advisors operating in your area and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • If your company participates in a 401(k) plan, make sure you have an appropriate company name. If this is the case, try to contribute enough to at least get your full company match. This is free money and you shouldn’t leave it on the table.

Image Credits: ©iStock.com/AndreyPopov, ©iStock.com/PixelsEffect, ©iStock.com/Prostock-Studio

The Here’s Why 401(k) Balances Went Up While the Pandemic post appeared first on the SmartAsset blog.

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