401(k) looks better after bull market but what happens in Washington could hurt
Susan Tompor
Hanging on has paid off for baby boomers who saw their 401(k) savings get burned in the Great Recession.
Average account balances for boomers who steadily contributed to a 401(k) are now far higher than those balances were before the recession took hold in December 2007, according to a report released last week by Fidelity Investments.
The average 401(k) account balance for baby boomers was $115,000 in June 2007. After the downturn, those average balances had plummeted to $85,000 by early 2009.
But as of June 2017, the average balance for baby boomers who kept consistently investing in their 401(k) plans in the past 10 years had climbed to $315,000.
It's safe to say that many people are no longer grumbling about their miserable 401(k) — if they kept investing. The Dow Jones industrial average has zoomed above 24,000.
But 401(k)s are at the center of a heated debate. The latest buzz out of Washington is that middle-class families could lose a huge chunk of the popular tax break associated with setting aside money into 401(k) plans, as part of tax reform negotiations in Congress.
President Donald Trump tweeted: "There will be NO change to your 401(k). This has always been a great and popular middle-class tax break that works, and it stays!"
But GOP lawmakers are floating a plan to reduce how much workers can set aside each year on a tax-deferred basis.
Plenty of moving parts exist on this one. But there's talk that Republicans are considering capping the pre-tax limit for contributions to as low as $2,400.
The expectation is that you'd still be able to contribute more money into a 401(k) plan even with that low pre-tax limit. But the additional money would be taxed first and then invested on an after-tax basis. It's possible that the after-tax money would go into Roth 401(k) accounts, and if so, the withdrawals from those Roth accounts would not be taxed in retirement.
Right now, money that's saved pre-tax is later taxed when its withdrawn from a regular 401(k) during retirement.
Expect more details and more debate to come.
Right now, some financial advisers are suggesting that workers aim to contribute as much as they can under the current limits — particularly in light of the uncertain tax picture.
Earlier this month, the Internal Revenue Service announced some cost-of-living adjustments to pension plans and stated that the maximum contribution consumers can make to their 401(k) will be $18,500 in 2018. That's up from $18,000 in 2017.
The extra catch-up contribution limit for employees aged 50 and older who participate in a 401(k) will remain unchanged at $6,000 in 2018.
The 401(k) story, of course, has not always been a happy one. Boomers who saw their higher-paying jobs eliminated in the Great Recession — and watched their retirement savings vanish — weren't always able to add more savings to the stock market and wait for better days ahead.
Many everyday savers who fled in panic did not jump back into stocks for many years, if ever. Five years after the crisis, a quarter of those who sold out of stocks still hadn't reinvested in stocks, Fidelity said,
Even now, many people still don't feel all that comfortable with their 401(k) plans.
According to the Fidelity Investments Ten Years Later analysis, only 38 percent of respondents feel more confident about their investment approach now than they did in 2007. That's down from 48 percent in a similar survey that Fidelity conducted five years ago.
Today's investors said the biggest changes they made in the years after the recession was reducing debt and increasing savings rates. Fidelity said savings rates for 401(k) customers have trended upward in the decade.
About 25 percent said the crisis caused them to reassess how much risk they could handle and shift to a more conservative investment approach.
The Fidelity analysis was based on an online survey conducted in August of more than 1,200 Americans who began investing before the crisis. In addition, Fidelity analyzed the behavior of nearly 1.5 million participants in Fidelity workplace retirement plans and more than 5 million clients with IRAs from June 2007 through June 2017.
Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.