The COVID-19 pandemic changed the world in more ways that most people can count, from the way kids go to school to how restaurants operate. One change that may not have been easy to predict — the pandemic has led to more money in defined contribution plans such as 401(k) plans, according to a new study from Alight. There are myriad reasons for this, including the fact that government stimulus checks sent out in 2020 and 2021 may have contributed to fewer people taking loans from their retirement accounts. Saving enough money while you’re working — and investing it effectively — is key to a successful retirement. For help getting there, consider working with a financial advisor.
Trends in Defined Contribution Plans
A number of statistics show the overall trend towards more money being held in retirement accounts over the course of the pandemic than in the years prior.
First, the average DC plan balance in 2020 went up 7% over the year prior, going from $122,150 to $130,330. Not only is that an increase year-over-year, it’s the highest average plan balance ever. This was achieved despite the fact that the pandemic caused significant volatility in the stock market, where a good amount of 401(k) funds are invested. That said, median plan balance did actually go down a touch, from $29,430 to $28,426 — potentially suggesting that the average increase was heavily impacted by some higher-end accounts increasing.
Average plan contributions also went up slightly, from 8.1% to 8.3%.
Perhaps the most illuminating statistic is the one looking at how many eligible participants took part in the defined contribution plans offered by their company. The average participation rate was 83%, but more than half of plans have at least 90% of their potential participants enrolled in the plan, while just 10% of plans have less than 50% participation rate.
One of the biggest challenges in addressing the retirement savings gap that currently exists in America is getting people to actually start saving by enrolling in the plans they have access to. More plans are moving to automatic enrollment — meaning new hires at a firm that offers a 401(k) will have to opt out of enrolling in a plan rather than opting in. The Alight study found that at companies with an automatic enrollment policy, the average participation rate for workers between 20 and 29 was 86%. Without it, it was just 50%.
401(k) Loans During the Pandemic
Taking a loan from your 401(k) account is not a decision to be taken lightly. It means using money you’d set aside for your future to solve a more short-term problem. Sometimes it is the only option available, but it still comes with some drawbacks, namely a 10% early withdrawal penalty on top of the taxes you’ll have to pay.
During the pandemic, a special law was passed making it easier to take an early withdrawal without having to take a loan. For this reason, the total number of loans went down from 11% to 7%. This may end up being an outlier rather than the beginning of a trend, as the special rules set up for the pandemic end.
The number of plan participants with an outstanding loan also went down from 24% to 22%.
The Bottom Line
The COVID-19 pandemic that impacted so much of life in 2020 and 2021 (and still to this day, in some cases) also changed the way Americans save for retirement. There were higher average account balances in 2020 than any year prior. Furthermore, fewer people had to take loans, partially because of rules easing the ability to take early withdrawals without tax penalties.
Retirement Planning Tips
To help you get the most out of your retirement plan, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you participate in a 401(k) plan at your company, make sure to see if you have a company match available. If so, 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.
Photo credit: ©iStock.com/AndreyPopov, ©iStock.com/PixelsEffect, ©iStock.com/Prostock-Studio
The post Here’s Why 401(k) Balances Went Up During the Pandemic appeared first on SmartAsset Blog.
Source: https://finance.yahoo.com/news/heres-why-401-k-balances-180959733.html