Several new industry reports indicate that the average savings rate for 401(k) retirement accounts of American middle-class workers, including employee deferred compensation plans and company contributions, continued to rise in 2023. Americans are putting more money into their 401(k) retirement accounts.
According to an annual survey conducted by the Plan Sponsor Council of America on 700 plus companies regarding 401(k) retirement benefit and profit-sharing plans, the average comprehensive savings rate in 2023 was 12.7%, higher than 12.1% in 2022. The employee deferred compensation plan (DCP) accounted for 7.8%, and the company contributions were 4.9%.
Hattie Greenan, Director of Research and Communications at the Plan Sponsor Council of America, mentioned, “Over time, the employee compensation deferral rate has been on the rise. During economic downturns, this rate may decrease.”
Simultaneously, a report by Vanguard revealed that the estimated average comprehensive savings rate for retirement accounts in 2023 was 11.7%, based on an annual analysis of over 1500 eligible retirement savings plans and nearly 5 million plan participants, similar to the 2022 results.
Fidelity Investments issues quarterly reports on retirement savings rates. Their analysis of 26,000 corporate retirement plans estimated a comprehensive savings rate of 14.1 as of September 30, 2024.
Vanguard suggests allocating 12% to 15% of annual income (including employer contributions) into savings accounts to meet future retirement needs.
Greenan recommended that employees aim to contribute enough to receive full employer matching within prescribed limits to accelerate accumulation in their retirement accounts over time.
The report by the Plan Sponsor Council of America showed that as of 2023, over 80% of retirement savings plans included employer matching contributions.
Greenan suggested that after reaching the matching limit, experts advise gradually increasing the deferral amount annually as long as one can afford it, thereby witnessing growth in retirement funds.
Starting in 2025, the maximum limit for employee deferred compensation in a 401(k) will increase from $23,000 in 2024 to $23,500. The additional contribution limit for employees aged 50 and above remains at $7,500, while for employees aged 60 to 63, the additional contribution limit will rise to $11,250.
Catherine Valega, founder of Green Bee Advisory in Boston and a registered financial planner, advised that if individuals plan to increase retirement account contributions in 2025, now is a crucial time to “boost deferred compensation savings throughout the year.”
She recommended updating 401(k) deferred compensation plans in December to allow the changes to take effect after a few paychecks and be ready for January.
Vanguard’s annual report indicated that in 2023, only 14% of employees reached the maximum contribution limit in their 401(k) plan. The report also found that an estimated 15% of employees made additional contributions in retirement plans with such features beyond the maximum contribution limit.