• September 27, 2023

The stock market took away their 401(k) millionaire status

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For an increasing number of employees, it has been like achieving titanium status in a loyalty program. They had joined an elite group of workers who had more than a million dollars in their workplace retirement plans.

The number of 401(k) millionaires in the fourth quarter of 2021 jumped 32 percent compared to a year earlier, according to Fidelity Investments, one of the largest managers of workplace plans.

But high inflation has caused consumer prices to spike, while the war in Ukraine and supply chain issues have rattled the stock market. The resulting economic mayhem has pushed thousands of 401(k) participants out of the millionaire’s club. The federal government’s version of a 401(k), the Thrift Savings Plan (TSP), also saw a decline in the number of retirement plan millionaires.

In its most recent quarterly retirement analysis, Fidelity reported that its number of 401(k) millionaires in the first quarter of 2022 fell to 406,000 from 442,000 in the previous quarter, a drop of 8 percent. The decline ended a record increase in the number of newly minted millionaires.

Fidelity reported that the number of individual retirement account (IRA) millionaires also dropped by nearly 8 percent. The number of TSP millionaires as of March 31 decreased by 11 percent to 100,360 from the previous quarter, according to the Federal Retirement Thrift Investment Board.

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Market fluctuations naturally have an impact on account balances, but it can be psychologically harder dropping out of the millionaire’s club. It’s a milestone that can signal that you have enough to retire comfortably. It’s a rarefied world when you consider so many Americans don’t even have access to a workplace retirement plan.

Average retirement account balances decreased in the first quarter of this year. The average 401(k) balance dropped to $121,700 in the first quarter, down 7 percent from the fourth quarter of 2021, and 2 percent from a year ago.

The number of 401(k) millionaires in the plans that Fidelity manages is a relatively small segment, just shy of 2 percent out of 20.7 million accounts, but the ability to grow their wealth in a workplace plan shows you don’t have to chase risky cryptocurrency investment opportunities.

Volatility in the stock market at the end of 2018 resulted in a nearly 29 percent drop in the number of 401(k) millionaires. Still, this elite group continued to sock money away in boring mutual funds. They have a history of staying calm when the stock market is chaotic. It’s how they crossed the millionaire mark in the first place.

If you’re a young investor, you can learn a lot from the investing behavior of 401(k) and TSP millionaires. They keep investing despite stock market turmoil, according to Mike Shamrell, vice president for Thought Leadership for Fidelity. The average 401(k) millionaire has been investing for 26 years.

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“These folks have seen a lot,” Shamrell said. “They’ve seen a lot of different market conditions. They’ve seen a lot of different economic swings. So I think they’re a good group that would definitely understand the value of staying the course and taking a long-term view. Because they have been in the game quite a long time, they understand that shifts are a normal part of the economic landscape.”

Some did flee to safer investments. Fidelity found that more than 5 percent of 401(k) savers moved into more conservative investments within their 401(k) account in the first quarter this year. However, that low portion indicates that the vast majority of workplace retirement investors have not been spooked by the downturn in the stock market, at least not yet.

The quarterly retirement analysis from Fidelity also showed that while average account balances declined because of the poor performance of the stock market, the total 401(k) savings rate reached record levels.

The total savings rate for the first quarter reached 14 percent, just short of Fidelity’s suggested savings rate of 15 percent. Those who reach the millionaire status typically have a 15 percent savings rate that includes a combination of what they’re putting in their account along with a matching contribution from their employer.

My husband and I pushed our eldest daughter to invest 15 percent of her pay into her 401(k) offered by her company earlier this year. Not long after that, the stock market started to plunge. Her balance has been dropping since she started investing.

“Where’s my money going?” she keeps asking, rolling her eyes after watching financial news reports on the stock market. Give it time, we tell her.

To the class of 2022: This is a great job market. You have this.

For individuals who have been participating in their 401(k) plan for the last 15 years, Fidelity says the average account balance has grown to $482,900, up from $64,900 in the first quarter of 2007, which was right on the cusp of the Great Recession. Long-term investing is one of the best things we try to get across when there is volatility,” Shamrell said.

Did you drop from the 401(k) millionaire’s club? Did you change your investment strategy as a result of losing your 401(k) millionaire status? Send your comments to [email protected]. Please include your name, city and state. In the subject line put “Millionaire’s Club.”