Retirement Accounts In Review
One of the biggest changes to retirement plans over the past few years has been the increases in auto enrollment into retirement accounts. People automatically enrolled are much more likely to be involved and stick with saving for retirement compared to those who are not. Instead of having to visit HR or create a Thrift Savings Plan account. The Blended Retirement System starting in 2018 led to the military jumping onboard with automatic enrollment. Fidelity takes time each quarter and highlights changes to retirement accounts they operate. You can find the entire document listed here for early 2019.
Thrift Savings Plan Auto-Enrollment
Starting in 2018 all new military members are automatically enrolled into the TSP and fund their Lifecycle fund (finally…). Previously their funds would go towards the G fund (Questions on these funds? Check out this post). This is a late change and one that was sorely needed. When you are young is the time to be aggressive, instead people were investing in the safest funds possible at the worst time. Only around 17% of military members actually leave with retirement benefits in the traditional “all-or-none” or “cliff-investing” retirement strategy. TSP has seen participation increase by nearly 30% since 2014 (41.7% to 54.8%) for military members (TSP Information located here). Also 81% of those in the blended system save in the TSP, only 45% in the legacy system contribute.
How Many People Are Investing?
The good news is that more people than ever are now contributing directly to their retirement plans. 73.5% of people were contributing by the end of 2018. People automatically enrolled by their employer are drastically more likely to stay with retirement plans compared to those who aren’t. 88% of individuals who participate and are automatically enrolled remain in the plan compared to only 52% who are not automatically enrolled.
Do you think it’s right for employers to “force” employees to be opted in at first? Employers have to make the decision to opt out but at the end of the day it works. People stay invested more when they can do it passively. Making people opt-out mean 40% more participate and over the previous decade this disparity has only grown. Many companies use target date funds for this auto-enrollment. Millennials (or pesky whipper-snappers) have nearly doubled (82%) their participation. As more employers take advantage of this it will be interesting to see if the automatic contribution percentage increases as well.
Looking at the big picture, people are saving more, employers are offering more, and more people are saving for retirement. Average savings rate are sitting around 14%, good, but difficult to provide lasting retirement without other savings.
Here’s what a 14% savings rate looks like for you to retire and be able to sustain your lifestyle.
The Bad News
401(k) Loans
Unfortunately, it cannot all be good news. 20.3% of people in the survey have an outstanding loan that they have taken from their retirement account. Various reasons were found for taking loans out.
- Paying down credit card debt
- Home improvement projects
- Buying a home
- Refinancing a mortgage
- Paying down overdue debts or bills
Early Cash-Out
In other unfortunate news, for employees that have left their company, 36% cash out their 401k’s. For those under the age of 59 1/2 are only taxed at your normal income tax rate and hit with a 10% penalty. Cashing out is nearly always the worst choice you can make with your previous 401k.
40% of individuals allowed their 401k’s to remain with their previous employer, which depending on your investment choices can work well. It can be a good idea to roll it over to an IRA if you have high fees or few investment choices. Only 23% of individuals made the choice to roll it over. This can be especially beneficial if you are only at an employer for a short time as many times accounts under $5,000 the investment company will auto-withdraw your money in a distribution. Employees will then receive a check and be unsure why or cause confusion during times where they may be moving or between locations.
This has been changing over the past few months and employees may soon see these accounts auto-enrolled into an IRA. If you receive a check and are unsure, contact the issuer and see if it’s a 401k distribution so you can deposit it into an IRA to avoid paying excess penalties.
Roth Option
Employers now offering a Roth 401k option is now up to 68%. Couple this with lowered tax brackets and effective tax rates make this an attractive choice for participants. Individuals participating in the Roth option has doubled from 2013 to 2018 from only 44.6% of plans allowing a Roth option in 2013 providing a new way for workers to tax advantage their retirement accounts between tax deferred options and post-tax contributions.
IRA Participation
IRA balances increased to $99,100 and number of accounts grew 6%. Contributions to Roth IRA’s and traditional IRA’s are split 55% to 45%, with more individuals taking advantage of the lowered tax rates. The average annual contribution to an IRA is $4,200. This was short of the $5,500 maximum contribution for 2018 for IRA’s (now up to $6,000 for 2019).
For those that choose to participate in both an IRA and 401k they now see an average combined account balance of $281,000. This is three times higher than employees who only use an IRA or only use a 401k. Folks, take advantage of the yearly limits because once the year is over there is no option to go back and contribute to a previous year. With a conservative 3% withdrawal rate this does only amount to $8,430 spending per year (before taxes).
Thanks for reading!