Data and Research August 30, 2024

Fidelity Finds Retirement Account Growth in Q2, Better Outcomes for Nonprofit Workers

Retirement savings for Gen X workers showed improvements in the year’s second quarter, and nonprofit workers continue to show improvements in retirement readiness.

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In its second quarter retirement analysis, Fidelity Investments found that retirement savers experienced a third consecutive quarter of growth across individual retirement, 401(k) and 403(b) account balances. Fidelity attributed the rising retirement account balances to positive market conditions, as well as strong contribution levels.

Based on data through June 30, the end of the second quarter, the average IRA balance in Q2 was $129,000, the average 401(k) balance was $127,100 and the average 403(b) balance was $114,700.

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In particular, Fidelity noted that Generation X participants made strong gains in their retirement savings, with current IRA contributions at the highest observed in the last five years.

Mike Shamrell, vice president of thought leadership at Fidelity, says 14% of Gen Xers took advantage of catch-up contributions in Q2, which may explain the improved account balances for this cohort.

By comparison, Shamrell says the youngest Baby Boomers turned 60 this year, and it is likely that a large percentage of this population is already in retirement. He says their balances will likely begin to taper, as many are not contributing anymore and are starting to draw down.

Data from Fidelity’s analysis is based on savings behaviors and account balances for more than 48 million IRA, 401(k) and 403(b) retirement accounts.

Fidelity also found significant strides made in retirement plans offered by nonprofit organizations, revealing improved participation and savings rates in its biannual study, “Better Outcomes for Nonprofit Organizations.”

After studying 2,500 nonprofit retirement plans, Fidelity revealed that the average plan participation rate in 2023 was 83%, and the total average savings rate was 11.2%—consisting of 7.4% in employee contributions and 3.8% in employer contributions.  

“As organizations within the nonprofit sector continue to add features to their plan to make it easier for their employees to save, I think we’re going to continue to see positive results as we as we go forward,” Shamrell says.

Shamrell adds that more nonprofits are using features like automatic enrollment and automatic escalation, which have helped participants contribute more. According to the survey, 43% of plans offered auto-enrollment in 2023, and 33% enhanced their enrollment communications.

In addition, 23% of nonprofit plans had auto-escalation in 2023, and 84% had Roth deferrals. Fidelity found that 87% of active participants with a balance are contributing to their account. Another positive finding was that 43% of participants in nonprofits’ plans are deferring at least 6% of their compensation to retirement savings.

Shamrell says Fidelity recommends at least a 15% savings rate, when the employee and employer contributions are combined, and notes that many nonprofit workers are inching toward that rate.

Meanwhile, Fidelity’s survey found that 11.5% of nonprofit participants have at least one loan outstanding, while Gen X workers have the highest loan utilization of any cohort at 17.2%.

“The loan data really helps underscore the need to help workers set up an emergency fund,” Shamrell notes.

Fidelity found that the number of nonprofit workers taking hardship withdrawals has grown annually since the COVID-19 pandemic, with 1.9% of nonprofit workers taking a distribution in 2023, up from 1.6% in 2022 and 1.3% in 2021. The top three reasons for nonprofit workers taking a distribution were foreclosures/eviction, medical reasons and for education.

Shamrell says in some instances, taking a hardship withdrawal might be a better option than a plan loan.

“What we try to tell people when they take out a loan is: Bear in mind, you’re going to have to start paying that loan back … and your loan payments are going to be automatically deducted from your paycheck, so your take-home pay is going to go down,” he says. “If you are really on a tight budget, it’s important to bear that in mind.”

Nonprofit employees also reported having higher levels of credit card debt, lower rates of emergency savings and lower confidence in their financial situations in 2023 than in previous years.

Fidelity recommended that employers share information with workers on how to build emergency savings, promote educational videos and webinars to help build financial literacy and promote strategies to help participants with student debt.

Fidelity analyzed data for nonprofit managed plans as of December 31, 2023 in its report.

Compliance August 30, 2024

Home Depot Sued Over Use of Plan Forfeitures

The home improvement retailer is the latest company accused of using forfeited 401(k) funds for its own benefit, instead of paying plan administrative expenses.

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Home Depot Inc. and its administrative committee are facing a lawsuit filed by a former employee, accusing the retailer of misusing plan forfeitures to reduce employer contributions to the 401(k) plan.

The complaint follows a slew of other recent cases against major employers over their use of 401(k) forfeitures. Some recent examples include complaints against Siemens Corp., Nordstrom Inc. and Bank of America Corp.

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In Cano v. The Home Depot Inc. et al, filed Monday in U.S. District Court for the Northern District of Georgia, a participant in the Home Depot Futurebuilder plan, Guadalupe Cano, accused the company of breaching its duties under the Employee Retirement Income Security Act by failing to use forfeited funds to pay plan administrative expenses and instead using the funds “exclusively for the company’s own benefit.”

“Using the forfeitures to ‘reduce employer contributions’ is always in the best interest of Home Depot because that option would decrease the company’s own contribution costs,” the complaint states. “In deciding between using the forfeiture to benefit Home Depot or using the forfeitures to benefit the participants, defendants are presented with a conflict of interest in administering the plan and managing and disposing of its assets.”

Using plan forfeitures to reduce employer contributions is allowed under IRS rules, but it is also important for plan sponsors to ensure their plan documents specifically authorize this usage. The Department of Labor has not previously expressed any general concerns about the use forfeitures, except in a case last year where it successfully sued plan sponsor Sypris Solutions for applying forfeitures to reduce employer contributions, in violation of a plan provision that required that the forfeitures first be applied toward plan expenses.

In addition, the recent lawsuit accused Home Depot of failing to undertake any investigation into which option was in the best interest of the plan’s participants and beneficiaries. For example, Home Depot did not investigate whether there was a risk it would default on its matching contribution obligation if forfeitures were used to pay plan expenses, according to the complaint.

Home Depot’s administrative committee also did not consult with an independent party in deciding upon the best action for allocating the forfeitures in the plan, the complaint alleges.

The plaintiff requests that the court order the disgorgement of all assets and profits secured by Home Depot as a result of its alleged ERISA violations, as well as remove fiduciaries who breached their duties and surcharge Home Depot for any transactions deemed improper, excessive or in violation of ERISA.

According to its most recent Form 5500, the Home Depot Futurebuilder plan has more than $12 billion in assets and 460,862 participants.

The plaintiff is represented by law firms Skaar & Feagle LLP and Edelson Lechtzin LLP.

Home Depot did not immediately respond to a request for comment.

In a separate case against the company, the U.S. 11th Circuit Court of Appeals sided with Home Depot over a 401(k) excessive fee lawsuit earlier this month.

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