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Which way are you heading after the recession?

A volatile year produced a record number of 401(k) millionaires—that is if you happened to have a 401(k).

By Cydney Baron | February 8, 2021

The number of 401(k) millionaires hit new highs in 2020, but that savings and investment milestone doesn’t tell the whole story.

While investment portfolios grew in the midst of the pandemic, those without retirement accounts suffered the downside of the pandemic’s economic impact. That is what’s known as a K-shaped recovery, said Brandy Marion, Institutional Wealth education and training manager at BOK Financial, adding that a K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.

“Just 30% of Americans have access to a 401(k),” Marion said. “Most people with 401(k)s and a stable job are doing fine,” she said. “But the remaining 70% are living in the real economy, meaning they feel the economic struggle more acutely.”

Let’s look at the numbers.

The number of 401(k) participants with $1 million or more in one of its plans increased by 17% from the second to third quarter of 2020 and the number of IRA millionaires increased 15% in the same period, according to a Fidelity Investments report.

The report showed that both numbers exceeded the previous highs set in the fourth quarter of 2019.

Strong market performance contributed to about 90% of the increases, according to the data. Despite the market’s sharp drop in March, the leading indices finished higher in 2020.

Most people with retirement accounts stayed the course with their savings, and about one in three increased their contributions by an average of 3%, according to Fidelity.

Another significant finding: The majority of retirement plan participants declined to take any CARES Act hardship withdrawals. Despite loosened restrictions, many recognized that the penalty-free withdrawal provision wasn’t all it was cracked up to be.

Falling behind

The growth in 401(k)s is an investment accomplishment, “but it’s not something that applies to everyone,” Marion said.

A down economy hits lower income jobs the hardest, Marion said. “If you’re living paycheck-to-paycheck, you don’t care that the stock market was up 1,000 points.”

A robust stock market doesn’t necessarily mean the economy is doing well, she added.

And not everyone with a 401(k) benefitted from the boom. One in 10 small businesses, typically those with 50 or fewer employees, suspended some or all of the company match during the pandemic.

“When employers suspend their match, employees often get nervous and stop contributing,” Marion said. “But that’s a lever that an employer can quickly utilize and avoid having to lay anybody off.”

In fact, while some companies suspended their 401(k) match to cut costs and minimize layoffs, many have reinstated their contributions as financial pressures eased.

“I know employees start looking for lifeboats but that employer is trying to be responsible and keep them there,” she said. “In my experience, any suspension of the match is temporary and employers do their best to reinstate it as quickly as possible.”

If your employer does suspend the 401(k) match, she said, that doesn’t mean you should automatically stop contributing. There are several factors to consider before making any changes to contribution levels.

Marion said some basic rules still apply when it comes to 401(k)s:

  1. If you have the funds, invest extra. No one ever retires and says they saved too much money.
  2. Don’t try to time the market. It’s better to put money in each pay period and take advantage of dollar-cost averaging.
  3. If you’re nervous, don’t lower your contribution rate. Instead, check your asset allocation.

“Millions of people rely on a 401(k) as their primary retirement plan,” Marion said. “Education and patience are key. Understand your options and the pros and cons of each type of plan. Understand the miracle of compound interest and trust that process.”