Number of 401(k) millionaires hit a new high
Market cited for boost, rather than contributions
WASHINGTON – During the pandemic, with millions of people unemployed, the number of workers joining the millionaire’s club hit record levels.
In its third-quarter retirement report, Fidelity Investments said the number of 401(k) participants with $1 million or more in one of its plans increased to 262,000, up about 17% from the previous quarter.
The number of IRA millionaires jumped to 234,000, up nearly 15%. Both topped the previous highs in the 2019 fourth quarter, when Fidelity reported 233,000 401(k) millionaires and 208,000 IRA millionaires.
The bulk of the increase in 401(k) account balances in the third quarter was due to market performance – about 90% – compared with contributions.
Although the market dipped in October, from July 1 to Sept. 30, there was positive market performance, which helped boost retirement balances, a spokesman for Fidelity said.
There was a record-setting spike in the number of millionaires investing in the Thrift Savings Plan (TSP), the federal government’s version of a 401(k). As of Sept. 30, out of nearly 5.9 million participants, there were 55,183 TSP millionaires, up from 45,219 in the previous quarter, according to the Federal Retirement Thrift Investment Board. Year over year, the number of TSP millionaires increased about 40%.
The number of millionaires – before taxes, of course – is a relatively small percentage of the total number of retirement plan participants.
Nonetheless, crossing the millionaire threshold is a momentous investment achievement.
“The people who were able to keep their jobs and keep their hours, for those people, we really did see that they just continued to contribute and continued to take advantage of the company match,” said Jeanne Thompson, senior vice president for Fidelity.
On the flip side, other workers were affected by reduced hours, furloughs and layoffs, resulting in them taking hardship withdrawals under the Coronavirus Aid, Relief, and Economic Security (Cares) Act, which relaxed a number of rules to make it easier for people to access their retirement funds.
“In some cases, even if it wasn’t them in particular, it could have been their spouse or partner, so they saw a drastic drop in their monthly income,” Thompson said.
If an employer allows plan loans, the Cares Act increased the limit on loans to $100,000 from $50,000. Workers younger than 591⁄ are ordinarily subject
2 to a 10% early withdrawal penalty, in addition to income tax due.
However, under the Cares Act, the 10% penalty is waived for retirement account distributions up to $100,000 for employees experiencing financial hardship related to the pandemic. The waiver covers withdrawals made on or after Jan. 1 until Dec. 31.
Despite the economic downturn, Fidelity reported that a relatively small percentage of the 30 million retirement accounts it manages took advantage of the Cares Act provisions.
From April until the end of October, 1.3 million individuals had taken a Cares Act distribution from their retirement account, representing about 5.2% of eligible employees. The average distribution amount was $10,000, and the median was $3,000.
There was some concern among plan providers that a lot of workers would take large withdrawals, putting them behind in their retirement savings, Thompson said. But this hasn’t happened.
“There are a fair amount of people who are taking just what they need,” Thompson said, “so they are taking that small amount as they need it versus taking a huge lump sum. They are getting what they need just to get by to make ends meet. As we all know, when you take the money out, it can be hard to put it back in.”
The Vanguard Group reported similar findings regarding withdrawals under the Cares Act. The company said 4.5% of participants withdrew assets from their retirement plan under the Cares Act, while less than 1% took a Cares Act loan.
The median distribution amount was approximately $12,000.
The median age was 43, and the median income was about $62,000.
“There were more ways to tap into your account, but what our research showed, which was surprising to us but is encouraging, is that very few people did,” said Dave Stinnett, principal in charge of Vanguard’s strategic retirement consulting team.
“And the amount people took out was relatively modest.”
Even so, those who took out a withdrawal could now have a retirement readiness gap, Stinnett said.
But if you take into account the median amount that people withdrew and the average age of those who took a distribution, all people have to do is increase by 1% how much they contribute from their paycheck next year, he said.
“And if they do that over the course of their working life, they’ll close that gap,” Stinnett said.
As of Nov. 12, more than 96,000 TSP participants took withdrawals under the Cares Act, totaling close to $2.3 billion.
Overall, despite turbulence in the stock market, retirement plan participants stayed the course. Fidelity said the average IRA balance was $117,700, up 6% from last quarter. The average 401(k) balance increased to $109,600, up 5% from the second quarter.
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