Perspective | The number of 401(k) millionaires hit a new high, despite millions left behind by the pandemic

The bulk of the increase in 401(k) account balances in the third quarter was due to market performance — about 90 percent — compared with contributions. Although the market dipped in October, from July 1 to Sept. 30, there was positive market performance, which helped boost retirement balances, a spokesman for Fidelity said.

There was a record-setting spike in the number of millionaires investing in the Thrift Savings Plan (TSP), the federal government’s version of a 401(k). As of Sept. 30, out of nearly 5.9 million participants, there were 55,183 TSP millionaires, up from 45,219 in the previous quarter, according to the Federal Retirement Thrift Investment Board. Year over year, the number of TSP millionaires increased about 40 percent.

The number of millionaires — before taxes, of course — is a relatively small percentage of the total number of retirement plan participants. Nonetheless, crossing the millionaire threshold is a momentous investment achievement.

“The people who were able to keep their jobs and keep their hours, for those people, we really did see that they just continued to contribute and continued to take advantage of the company match,” said Jeanne Thompson, senior vice president for Fidelity.

On the flip side, other workers were affected by reduced hours, furloughs and layoffs, resulting in them taking hardship withdrawals under the Coronavirus Aid, Relief, and Economic Security (Cares) Act, which relaxed a number of rules to make it easier for people to access their retirement funds.

“In some cases, even if it wasn’t them in particular, it could have been their spouse or partner, so they saw a drastic drop in their monthly income,” Thompson said.

If an employer allows plan loans, the Cares Act increased the limit on loans to $100,000 from $50,000. Workers younger than 59½ are ordinarily subject to a 10 percent early withdrawal penalty, in addition to income tax due. However, under the Cares Act, the 10 percent penalty is waived for retirement account distributions up to $100,000 for employees experiencing financial hardship related to the pandemic. The waiver covers withdrawals made on or after Jan. 1 until Dec. 31.

Here’s an FAQ on the Cares Act rules that addresses the financial relief provided to retirement plan participants.

Despite the economic downturn, Fidelity reported that a relatively small percentage of the 30 million retirement accounts it manages took advantage of the Cares Act provisions.

From April until the end of October, 1.3 million individuals had taken a Cares Act distribution from their retirement account, representing about 5.2 percent of eligible employees. The average distribution amount was $10,000, and the median was $3,000.

There was some concern among plan providers that a lot of workers would take large withdrawals, putting them behind in their retirement savings, Thompson said. But this hasn’t happened.

“There are a fair amount of people who are taking just what they need,” Thompson said, “so they are taking that small amount as they need it versus taking a huge lump sum. They are getting what they need just to get by to make ends meet. As we all know, when you take the money out, it can be hard to put it back in.”

The Vanguard Group reported similar findings regarding withdrawals under the Cares Act. The company said 4.5 percent of participants withdrew assets from their retirement plan under the Cares Act, while less than 1 percent took a Cares Act loan. The median distribution amount was approximately $12,000. The median age was 43, and the median income was about $62,000.

“There were more ways to tap into your account, but what our research showed, which was surprising to us but is encouraging, is that very few people did,” said Dave Stinnett, principal in charge of Vanguard’s strategic retirement consulting team. “And the amount people took out was relatively modest.”

Even so, those who took out a withdrawal could now have a retirement readiness gap, Stinnett said.

But if you take into account the median amount that people withdrew and the average age of those who took a distribution, all people have to do is increase by 1 percent how much they contribute from their paycheck next year, he said.

“And if they do that over the course of their working life, they’ll close that gap,” Stinnett said.

As of Nov. 12, more than 96,000 TSP participants took withdrawals under the Cares Act, totaling close to $2.3 billion.

Overall, despite turbulence in the stock market, retirement plan participants stayed the course. Fidelity said the average IRA balance was $117,700, up 6 percent from last quarter. The average 401(k) balance increased to $109,600, up 5 percent from the second quarter.

Reader Question of the Week

If you have a personal finance or retirement question, send it to [email protected]. In the subject line, put “Question of the Week.” Please note that questions may be edited for clarity.

Q: Do you have a past article on bitcoin that you could share with me?

A: Yes, I do. In case you are not familiar with bitcoin, it is a cryptocurrency — actually, lines of code — stored on a computer or held by a third party in a virtual wallet. It’s yet to become a widespread form of payment. But enthusiasts are speculating that it might one day. This is a very risky and volatile investment.

Legendary investor Warren Buffett called bitcoin speculative and “rat poison squared” during Berkshire Hathaway’s 2018 annual shareholder meeting.

“There’s one thing a currency is supposed to do that bitcoin never has. That’s maintain a stable value,” wrote former Washington Post reporter Matt O’Brien.

Here are some links to coverage about this cryptocurrency.

Retirement Rants and Raves

I’m interested in your experiences or concerns about retirement or aging. You can rant or rave. Send your comments to [email protected]. Please include your name, city and state. In the subject line, put “Retirement Rants and Raves.”

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