The coronavirus (COVID-19) pandemic has taken a heavy economic toll on many employees and industries, but it has also widened the wealth gap between the haves and the have nots.
And we’re not just talking about the 1 percent that has done well.
Ordinary Americans with 401(k) or IRA retirement accounts have seen their wealth surge in the second quarter of 2020, with the number of retirement accounts worth at least $1 million jumping by 49 percent.
An analysis by Fidelity Investments suggests that retirement accounts benefitted from the stock market’s remarkable rebound from its late March lows, driven in large part by technology stocks. The market’s rally, in turn, was fueled by Federal Reserve action and pandemic relief legislation passed by Congress.
While some hard-hit Americans have been forced to tap into their retirement funds to make ends meet, the Fidelity analysis shows many more continued or even increased IRA contributions, resulting in record-breaking flows to retail retirement accounts. Contributions to workplace retirement accounts, from both employees and their employers, remained steady, the analysis found.
“While the stock market’s performance in Q2 helped drive workplace retirement account balances higher, employer contributions also played a key role,” said Kevin Barry, president of Workplace Investing at Fidelity Investments. “Nearly 90 percent of employers continued to offer matching contributions to their employees over the last quarter, despite the unsteady business landscape.”
What may be more unusual given the uncertain economic circumstances is that employees actually stepped up their retirement savings during this time. The researchers found that year-to-date contributions to IRAs increased by more than 20 percent.
In the second quarter, the average IRA balance was $111,500, a 13 percent increase from the first quarter and slightly higher than the average balance of $110,400 a year ago. The average 401(k) balance rose to $104,400 in the second quarter, a 14 percent gain from the quarter before the pandemic hit.
Stabilizing effect of the CARES Act
The analysis also stresses the stabilizing role played by the CARES Act, the first comprehensive aid package passed by Congress in late March. It allowed retirement account holders to tap into their accounts to meet short-term needs without penalty.
As of the end of the second quarter, 711,000 people had taken a CARES Act distribution from their retirement account, which represents 3 percent of eligible employees on Fidelity’s workplace savings platform.
In many cases, their accounts rose by more than their withdrawal as the major stock market indices hit record highs, despite significant damage to economic growth.