Michelle Singletary: Record number of workers becoming millionaires with their boring 401(k)s and IRAs

Meet the newly minted millionaires next door.

They didn’t put all their money into a Microsoft-type stock that made them rich. They didn’t take a chance on speculating in cryptocurrency with its crazy volatility or start a business that they then sold to some billionaire.

No, many current millionaires are government workers, civil servants, educators, military service members (or retired military), managers or co-workers clocking in just like you, leaving at the end of a shift to run and pick up their kids from school. Many never earned six-figure salaries.

They’ve been investing for nearly three decades, taking every dollar offered by their employers in matching retirement plan contributions. They also don’t cash out their retirement savings when they change jobs.

And, most importantly, they didn’t let a pandemic or the related economic problems, or skittish investors, scare them away from the stock market.

In its quarterly retirement analysis, Fidelity Investments reported that its number of IRA (individual retirement account) and 401(k) millionaires hit an all-time high. Likewise, the number of millionaires investing in the Thrift Savings Plan (TSP), the federal government’s version of a 401(k), also spiked significantly.

What it tells us is that even amid economic uncertainty, people are still focused on their retirement savings goals, said Jason Jagatic, head of workplace thought leadership for Fidelity.

Fidelity, one of the largest managers of workplace plans, reported that its number of 401(k) millionaires in the fourth quarter of 2021 jumped 32% to 442,000, up from 334,000 a year earlier. The number of IRA millionaires increased 30%, from 288,300 to 376,100, for the same time period.

The number of millionaires investing in the Thrift Savings Plan also saw surges, by nearly 50%. As of Dec. 31, there were 112,880 TSP millionaires, up from 75,420 a year ago, according to the Federal Retirement Thrift Investment Board.

For the fourth quarter, account balances also ballooned, Fidelity said.

Its average 401(k) balance increased to a record $130,700 in the fourth quarter, up 4% from the previous quarter and 8% from a year ago. The average IRA balance was down slightly to $135,600 for the fourth quarter compared with the third quarter. But IRA balances were up 6% from the 2020 fourth quarter.

A record 38% of individuals increased their 401(k) contributions in 2021, with an average increase of more than 3%, Fidelity said.

It was wonderful to see younger Gen Z workers (individuals born between 1997 and 2012) increasing their retirement contributions – 53% increased their contribution rate last year. Investing early and letting compounding work for them is key.

Even as the economy was struggling to cope with COVID-related downturns, employers kept offering workers matching contributions to their retirement plans. The average employer contribution last year reached $4,080, according to Fidelity.

Still, the good news from Fidelity needs to be weighed against other data that shows a different situation for folks not benefiting from the stock market and employer-sponsored plans. They are being left behind in the accumulation of wealth that can carry them through retirement. If they don’t catch up, they will be more likely to be left living entirely on Social Security, which is having its own issues with solvency.

“We know that many people are still struggling with the economic impacts of the last couple of years,” Jagatic said.

Only slightly more than half (50.5%) of all American families have retirement accounts, according to Federal Reserve data from 2019, the most recent available. Only 34.9% of Black families and 25.5% of Hispanic families have such accounts, compared with 57.2% of white families.

Millions of workers without employer-provided retirement savings plans struggle to save for retirement or face the prospect of not being able to retire at all, according to a survey from Pew Charitable Trusts.

Pew surveyed 1,000 workers who said they worked at nontraditional jobs – gig workers, freelancers, sole proprietors, day laborers. The vast majority didn’t participate in a workplace plan during the year leading up to the survey.

“If given the opportunity, many workers will save,” Pew said.

This is true. When employers automatically enroll employees, they continue investing. The most common default savings rate for auto-enrolled employees is 3%, according to Fidelity. But a growing number of companies are pushing this rate up. Of the Fidelity 401(k) plans that auto-enroll employees, nearly 37% automatically enrolled employees at a 5% or higher contribution rate.

There’s still an opportunity to save for retirement if you don’t have a workplace plan. Workers can contribute to an IRA, with a maximum annual contribution for 2022 of $6,000. If you’re 50 or over, you can contribute an additional $1,000 to an IRA in a catch-up contribution, for a total of $7,000.

Yet, we know having the push from employers can make a huge difference.

“With workplace plans, I think one of the major advantages often is employers are giving matches, whereas you are not getting that match through an IRA,” Jagatic said.

Although the number of 401(k) millionaires in the plans that Fidelity manages is a relatively small percentage – 2% out of 20.4 million accounts – the growth is still staggering. As of Dec. 31, out of 12.3 million IRA accounts, 3% of investors had $1 million or more.

Many investors fear missing out on the next great thing. Other investments such as cryptocurrency have a more exciting feel to them. “Fortune favors the brave,” actor Matt Damon says in a commercial peddling an app where people can trade digital currencies such as bitcoin.

But as the Fidelity data shows, boring has worked to make a wave of workers wealthy in a far less risky way.