Each year, when it's time to enroll and change up your employee benefits, do you find yourself wondering how much you should be putting into your 401(k), whether you should contribute on a pre-tax or Roth basis, and what actual investments you should use? Do you ever wonder what your colleagues are doing?
If so, you're in luck. Every year, Vanguard comes out with a report that highlights trends from 401(k) plans and other retirement plans it administers, providing a glimpse into Americans' retirement strategies on a broad scale.
So let's dig in: how are other people managing their 401(k) accounts and how do your retirement savings stack up?
Percentage Of Salary Saved Per Year
On average, participants divert nearly 7% of their salary to 401(k) savings. Lumping all participants together can be misleading though since contribution rates can vary materially by age and income level.
For participants earning less than $30,000 a year, the average 401(k) savings rate is 4.5%, while those earning $100,000+ a year are allocating more than 8% of their salary to their 401(k) plans. Older participants generally contribute a higher percentage of their salary to their 401(k) plans than younger workers. Employees under the age of 25 contributed 4.7% of their salary while those 55 and older contributed 8.4%.
Overall, 20% of participants contributed more than 10% of their salary and 13% of participants were able to reach the 401(k) contribution maximum for 2017 ($18,000). Employees who reached the 401(k) contribution maximum "tended to have higher incomes, were older, had longer tenures with their current employer, and had accumulated substantially higher account balances."
Total Amount Saved
While percentages can be helpful in some circumstances, people are often interested in real numbers. According to Vanguard's 2018 report, the average account held a balance of nearly $104,000. However, this figure is misleading because a small number of large accounts are skewing the average higher. The median retirement account balance stood much lower, at just $26,000.
Number Of Investments Used
Employees typically have the option to choose among 18 different funds (counting an entire series of target-date funds as a single fund), but the average participant's account includes just two or three funds.
One reason for the low number of funds deployed could be that more participants are using target-date funds. Overall, 92% of plans offer target-date funds and when they're offered, nearly 80% of participants use these funds, at least for a portion of their investments.
Overall, 51% of participants opt to keep their lives simple and invest all of their money in a single target-date fund.
Pre-Tax Vs. Roth
When I lead personal finance sessions, one of the most frequent questions asked is whether people should be investing in a pre-tax 401(k) or Roth 401(k). My default answer is, it depends on the specifics of your particular situation, including your current and future income levels, current and future tax bracket, and current tax diversification, among other factors.
If you are a recent college graduate who is earning a low salary compared to your anticipated future income, the Roth 401(k) option may be advantageous. On the other hand, if you are currently in the highest tax bracket, but expect to fall into a lower tax bracket down the road, the pre-tax 401(k) option may be mathematically optimal.
Nearly 70% of Vanguard 401(k) plans offer participants a Roth 401(k) option. However, only 12% of participants with access to either a pre-tax 401(k) or Roth 401(k) option use the Roth.
Mega Backdoor Roth IRA Use
Many articles have been written on the mega backdoor Roth IRA strategy - a technique that allows participants to save up to an additional $36,000 in their 401(k) plans through after-tax contributions that are subsequently converted to a Roth 401(k) or withdrawn to a Roth IRA.
To be able to use this strategy, your 401(k) plan needs to allow participants to contribute on an after-tax basis and then perform an in-plan conversion or in-plan distribution. Those mechanisms allow employees to either convert after-tax contributions to a Roth 401(k) within the plan, or withdraw those after-tax contributions into a Roth IRA, outside of the plan.
Just 17% of Vanguard 401(k) plans allow employees the opportunity to contribute on an after-tax basis and only 14% of the plans offered Roth in-plan conversions.
When offered, just 7% of participants contributed on an after-tax basis. While not reported, the percentage of participants able to fully maximize contributions to their 401(k) plans through reaching the 401(k) contribution ceiling of $18,000 and then contributing an additional $36,000 through after-tax contributions, is likely a very small group of people.
Where Do You Stand?
Vanguard's reporting provides interesting insight into Americans' retirement savings strategies, including by amount and plan type. But at the end of the day, averages only tell us so much because one size does not fit all.
Your retirement savings strategy should reflect your individual objectives, anticipated salary trajectory, and access to specific plan options. By developing a retirement savings strategy that reflects your personal situation, you will be well on the way toward achieving your financial goals.