Fidelity’s analysis of its 12 million 401(k) accounts in more than 20,200 corporate defined contribution plans shows that average annual employee contributions grew 7.3% over the past five years to $5,900 at the end of the third quarter, up from $5,500 at the end of the same quarter 2007. Meanwhile, average annual employer contributions rose to $3,420 at the end of the third quarter, up 19% since the same period 2007, when it was $2,880.
The average 401(k) balance reached $75,900 at the end of the third quarter, the highest it has been since the company began tracking the data more than 12 years ago.
For the 14th consecutive quarter, more participants increased their deferral rate than decreased it (4.6% vs. 2.8%). In addition, participant contributions continue to be allocated to more balanced investments, such as target-date funds (TDFs).
While new contributions into balanced options grew to 36% from 20% five years ago (34% specifically into TDFs, up from 15% five years prior), new contributions into equities decreased to 46% from 62%. Contributions into conservative options remained relatively flat at 18% over the five-year period.
Fidelity noted that employer contributions are rising at faster rate than employees’ contributions. While plan design features such as auto-enrollment and auto-escalation have had a positive impact over the past five years, employers could use them more effectively to drive even stronger outcomes.
During the third quarter, new participants who were auto-enrolled had an average deferral rate of 3.7%, while new participants in plans not utilizing auto-enrollment had an average deferral rate of 8.4%. This may be attributed to plans auto-enrolling participants at a too-low default deferral rate, such as the common 3%, Fidelity suggests. The company recommends plans adopt a 6% auto-enrollment default rate with an automatic escalation of 1% annually, up to 10%.