Millennials Increasingly Embrace Roth and Traditional IRAs

Every quarter, Fidelity Investments releases a refreshed dataset outlining trends within its book of business covering defined contribution (DC) plans and individual retirement accounts (IRAs), with the latest cut of data published today.

Overall, Fidelity reports, the average account balance at the end of Q1 2018 for individuals who save in both a Fidelity IRA and a Fidelity workplace savings account, such as a 401(k) or a 403(b), rose to $299,600. This represents an impressive 9% increase over the average balance of $275,700 at the end of Q1 2017.

However, the average account balance for 401(k)s, 403(b)s and IRAs taken individually actually dipped slightly from what was measured in Q4 2017. According to Fidelity, the average 401(k) balance dropped to $102,900, about 1% lower than Q4 2017 but still an 8% increase from Q1 2017. The average IRA balance also dipped about 1% to $105,100 from last quarter, Fidelity says, but the average still increased 8% year-over-year. The average 403(b) account was $82,100, down slightly from Q4 2017 but up 9% year-over-year.

According to Fidelity researchers and other experts who have spoken out recently on the subject of market volatility, these figures put pressure on retirement plan sponsors and their adviser/provider partners to help individual savers stay focused on the long-term. It is all too easy for less-skilled investors to see one quarter’s loss and overlook the sizable yearly gain they have received in their accounts.

Within the Fidelity book of business, 401(k) savings rates continue to increase. The total savings rate for 401(k) investors, which combines the average employee contribution rate plus an employer’s 401(k) match, reached a record high of 13.2% at the end of Q1, up from 13.0% in the previous quarter. In addition, Fidelity finds 30% of 401(k) savers increased their contribution rate over the last 12 months, with Millennials leading the charge—as 36% increased their contribution rate.

At first blush, these statistics seem to contradict another recent analysis, published by BMO Global Asset Management, which found evidence that the overall average contributions rate for retirement accounts has fallen over recent years. According to the BMO data, deferral rates are down 1.7% across all sectors since 2010. However, BMO experts make an important distinction about this figure by noting that automatic enrollment usage continues to increase dramatically—up 36% in the last 10 years. Early adopters of automatic enrollment traditionally used a 2% or 3% default deferral, and automatic escalation remains less common. As a result, while more people than ever are saving within defined contribution plans, the top-line average deferral rate has, in fact, fallen. This is not really a bad thing viewed from the perspective of promoting a greater total amount of savings, but it does show that sponsors could improve outcomes by using more aggressive plan designs. 

Turning back to the Fidelity book of business, the firm reports IRA contributors have grown by double digits. Among IRA holders, the average contribution amount in Q1 2018 was $3,180, a 3% increase over the average contribution amount of $3,100 a year ago. The percentage of people who contributed to their IRA in Q1 increased 14% over a year ago. Among Millennials, IRA contributions increased 27%, Fidelity finds.

“Despite some market volatility at the beginning of 2018, retirement savers stayed on track and continued to contribute to their IRAs and workplace savings plans,” observes Kevin Barry, president of workplace investing at Fidelity Investments. “In addition, an increasing number of savers are contributing to both their IRA and workplace savings plan. Combining the benefits of these two savings vehicles helps build a diversified retirement savings strategy and can provide a significant boost to an individual’s retirement savings efforts.”

In an effort to demonstrate the positive impact of consistent, long-term saving behaviors, Fidelity’s Q1 analysis also highlights how 10-year old account balances reach record levels. Individuals who have saved in their company’s 401(k) for 10 years had a record high average account balance of $290,100 at the end of Q1, compared with an average of $250,500 a year ago. At the same time, 15-year account balances jumped 9%, and individuals who have saved in their company’s 401(k) for 15 years had an average balance of $379,600 at the end of Q1, up from $330,200 a year ago.

“Especially during periods of market volatility, it’s important to take a long-term approach to retirement savings,” Barry adds. “Making regular contributions over time is a key part of building your savings, especially a retirement nest egg.”

Continuing trends measured in previous iterations of the Fidelity data, researchers point to increased use of Roth options, managed accounts and target-date funds. Roth investment options, in particular, continue to increase in popularity. As of Q1, 75% of all IRA contributions from Millennials went into Roth IRAs. In addition, the average contribution rate to Roth 401(k) plans rose to 6.7%, a slight increase over the 6.6% contribution rate in Q1 2017.

“Fidelity’s Roth for Kids, which allows an adult custodian to contribute the equivalent of the child’s yearly income to an account, had a 78% increase in the number of accounts with contributions,” Barry reports.

Other relevant findings show managed accounts are now offered by more than 5,300 employers, or more than double the percentage offering a managed account option five years ago. Among large employers (more than 50,000 employees) with a Fidelity 401(k) plan, nearly 50% offer a managed account.

Despite growth in the use of managed accounts, Fidelity still finds increased use of target-date funds to manage savings. As of the end of Q1, 74% of individuals saving in a 401(k) or tax exempt plan had invested in a target-date fund, a 3% increase over last year. In addition, 52% of individuals held all of their savings in target date funds—among Millennials, the number rose to 70%.

For additional details on Fidelity’s Q1 2018 analysis, readers may access Fidelity’s “Building Futures” overview, which provides additional information insight on retirement trends and data.