Auto Default Contributions Hit High of 4.1% Among Fidelity Participants

Fidelity Investments reports the average default contribution rate for auto-enrolled employees hit an all-time high of 4.1% in the second quarter, according to analysis drawing on its participant pool released Thursday.

In Q2, 39% of employers offered auto-enrollment, which was relatively steady from Q1, and shows a continued commitment to automatic retirement savings as a mechanism to get, and keep participants contributing, according to the country’s largest recordkeeper. The data “shows that when participants are automatically enrolled in a plan and begin to see their savings grow, they are especially likely to remain enrolled in the plan,” Fidelity wrote in the report.

The SECURE 2.0 Act leans heavily on auto enrollment to help reduce the workplace retirement savings gap. Starting in 2025, newly created retirement plans will be required to automatically enroll their qualified employees at a contribution rate between 3% and 10% of pay, and plan sponsors must escalate the contribution rate by 1percentage point annually until it reaches either 10% or a maximum of 15%.

Overall, retirement balances increased for the third straight quarter due in part to improving market conditions, according to the report. Average 401(k) balances were up 4% quarter-on-quarter, the average IRA was up 5%, and the average 403(b) account balance increased 5%. Retirement account balances for the sample group of participants quarter-over-quarter, and year-over-year, were:

The recordkeeper also reported a jump in both IRA account openings and asset levels. The total number of IRA accounts rose to 14.3 million, an 11% increase over Q2 2022, while total assets grew 14.3%, according to Fidelity.

Roth IRAs were the most popular option, making up 59.1% of all IRA contributions in the quarter, a trend that appears to be spreading among consumers, says Rita Assaf, vice president of retirement and college products for Fidelity.

“We’re seeing a general increase in Roth IRA interest,” Assaf says, noting that her team has been tracking Google search trends for the savings vehicle. “Roth IRA search terms over the last five years have increased a lot across all age groups.”

Assaf says consumer interest in personal finance and investing has increased generally, as well, as technology and resources become more “democratized.” She attributes the trend to online savings and brokerage options that don’t require an in-person meeting with an adviser, as well as a surge in social media content focused on financial wellness.

Younger investors (ages 18-35) were one of the drivers of IRA growth, Assaf notes, with Fidelity seeing a 34.4% increase of that age cohort in IRA accounts year-over-year.

“Those [younger investors] that have dipped their toes into Roth, when we ask why, they say they really like the control of it,” she says. They also say they hear about it “from parents, or friends, or social.”

In recent quarters, the data has also shown that women are becoming more engaged, and saving more, in both workplace and IRA savings, Assaf says.

“Just in general, women have become more engaged with their overall financial well-being, which is different than previous generations,” she notes. “Millennial women may have seen their mothers in the workplace, and been exposed to workplace plans when they became live in ‘70s, but it’s a relatively a new concept to own your financial wellness, and own your retirement savings….I think it’s encouraging, that young women as well are taking an active role in their finances.”

In less positive news, outstanding 401(k) loans increased slightly, with the percentage of participants with a loan outstanding rising to 17.1% in Q2, compared to 16.6% last quarter. Those rates were still higher than during the COVID-19 pandemic, Fidelity noted.

Fidelity also noted that total 401(k) savings rates were slightly lower than the prior quarter, clocking in at 13.9% when including employer contributions, as compared to 14%. That rate is still higher than Q4 2022 (13.7%) and Q3 2022 (13.8%), but not yet at Fidelity’s suggested rate of 15%.