Wall Street’s blockbuster gains in 2021 helped pad savers’ retirement accounts, lifting the average balance on some popular investment plans to new highs.
The average 401(k) plan balance stood at $130,700 at the end of last year, up 7.6% from 2020, according to Fidelity Investments. The median balance, a better measure of the typical plan size, rose 2.1% to $28,600. The figures are based on a review of 20.4 million Fidelity accounts. Only about 60 million Americans actively participated in 401(k) plans at the end of the third quarter last year, according to the Investment Company Institute, an association representing investment funds.
The average balance for individual retirement accounts on Fidelity’s platform also climbed to a record-high $135,600 as of the fourth quarter of 2021, up 5.9% from a year earlier.
Retirement plan gains came as cheap money thanks to historically low interest rates combined with strong consumer demand and corporate earnings growth to keep investors in a buying mood.
The S&P 500 scored its third-best performance in the last decade in 2021, rising 26.9%, for a total return of 28.7%, including dividends.
Why the big gap in gains between the S&P 500 and the average 401(k) or IRA? Because those plans typically hold a variety of asset classes, including foreign stocks, bonds and cash, for example, while the S&P 500 is comprised only of U.S.-based stocks.
Investors who had been pumping money into their Fidelity 401(k) plans for at least 10 years averaged a balance of $413,600 at the end of the the fourth quarter, the company said. In contrast, plans held by Gen-Z savers had an average balance of $5,300.
Savers helped drive their returns last year by setting aside more of their pay for their retirement plans. Employee contributions to 401(k) plans averaged 9.4% by the end of 2021, up from an average of 9.1% a year earlier and an average of 8.9% at the end of 2019, Fidelity said.
Boosting your contribution rate, even by 1%, can make a big difference over 10 or 20 years, assuming the saver remains employed and making contributions the entire time.
The IRS has raised the annual contribution limit to $20,500, with workers age 50 or older eligible to contribute an additional $6,500 as a “catch-up” contribution.
The amount of money employers put into their employees’ retirement accounts also rose. By the end of 2021, the average 401(k) contribution made by employers was $4,080, up 1.2% from a year earlier, but down 0.5% from 2019.