Fact, Fiction or Both: 401(k)s

401(k) plans became a bit of a conversation online this week. While I don’t feel the reason why is very important (if you guessed it was political, you win) there were lots of statistics thrown out about retirement plans in general. Since some of these supposed “facts” seem outlandish, I thought a brief “Fact, Fiction, or Both” about 401(k)s and other retirement plans was in order.

“Only 43% of Americans have a 401(K) plan.” Verdict: Fact, as long as 401(k) is used as a catch-all for all defined contribution plans, including 403(b)s, according to the Pension Rights Center.

“Only 43% of Americans have a retirement plan.” Verdict: Fiction. According to the Pension Rights Center, 56% of US workers participated in a workplace retirement plan in 2019. Although pensions are becoming less prevalent, they are still widely used for public-sector retirement plans. 83% of state and local government workers participate in a workplace retirement plan and more than 90% of those workers are in a pension plan.  

“I’m not in the stock market.” Verdict: Both. While that’s certainly possible, often that phrase is used by retirement plan participants who do not realize that the funds inside their 401(k) or pension are invested, at least partially, in the stock market.

“The average 401(k) is down 20% this year.” Verdict: Fiction. While that was true through the first quarter, by the end of June the average account was only down 2% according to data from Fidelity. From that same data pool, fewer than 1% of 401(k) participants stopped investing in the second quarter while 9% actually increased their contributions.

“The average 401(k) plan balance is $90,000 to $112,000.” Verdict: Both. It all depends how you want to define “average”. The mean (add the total value up and divide by the number of participants) was just over $112,000 at the end of 2019 according to Fidelity while Vanguard reported more than $92,000. However, the median (the midpoint of all participants) is just $24,800 at Fidelity and $22,200 at Vanguard.

“The average 401(k) plan value for a worker nearing retirement is $212,600.” Verdict: Fact according to Fidelity, if mean is synonymous for average. The median number is $67,000 for those between 60 and 69 years old, again according to Fidelity. No matter which rule of thumb is used (10x annual salary or the 4% rule), both of these numbers are well below the standard of what most people would consider a comfortable retirement.

What other questions do you have about 401(k)s and retirement savings? Send them my way so I can do another edition of “Fact, Fiction, or Both” soon.

Photo by Markus Winkler on Unsplash