Understanding 401(k): How it works and why it matters
What is the 401(k) plan? Key benefits and ways to maximize savings.
- Many 401(k) savers benefited from not panic in the beginning of 2025.
- Bystander cash helps to ensure that retirees and those close to retirement don’t panic in stock market meltdowns.
- According to new data from Fidelity Investments, the average balance of 401(k) rose 8% in the second quarter to June 30th.
Retirement savers, who didn’t panic in early 2025, were to earn rather sharp profits in their second quarter 401(k) plan, instead of more pain.
And some even ended up as billionaires.
According to the latest data from Fidelity Investments, the 401(k) billionaire hit an all-time high in the second quarter. Fidelity reported that 595,000 savers had at least $1 million in 401 (k) in the second quarter of 2025.
This is 16% up from the 512,000 savers split into seven digits in the turbulent market in the first quarter. However, many savers saw losses at the beginning of the year. At the end of last year, Fidelity reported that 537,000 people had become billionaires created by 401(k).
Average 401(k) balance reached a new record high
On average, many savers didn’t have to be afraid to peek at the 401(k) statement as of late June.
According to new data from Fidelity Investments, the average 401(k) balance rose 8% in the second quarter ending June 30th. This has been the highest quarter since the fourth quarter of 2023.
According to Fidelity Investments, the average 401(k) balance also hit a new record high in the second quarter, with the average balance being $137,800 nationwide.
As a benchmark, some experts recommend that you aim to earn at least one salary in your retirement savings between the early 30s and mid 30s. Save early and consistently saves will help you continue to make retirement nest eggs.
Fidelity Investment’s 401(k) data is based on 25,600 definition contribution plans for a variety of companies across the country. As of June 30th, the plan covers 24.6 million participants.
“The fact that many of the retirement savings maintained the course through market volatility that occurred at the beginning of the quarter — including continuing to save and not changing asset allocation — played a large part in the balance of account balance that many savers experienced.”
Shamrell said history showed that when markets recover, they often do so quickly.
The stock fell in the early 2025 tariff talks
Without a doubt, investors included the dramatic fallout in April on Wall Street early in 2025, as they caused joints in both the stock and bond markets, including the dramatic fallout in April.
Despite ugh headlines early in the second quarter, many retirement savers did not succumb to panic and hit the brakes.
According to Fidelity Investments, only 5.5% of retired savers who adjusted their 401(k) asset allocation in the second quarter left. Of the people in this group, 82.5% (approximately 8 of the employees) only changed one change.
The latest updates from Fidelity are more comfortable than those reported a few months ago.
In June, Fidelity reported that average 401(k) retirement account balances fell 3% from the end of last year to $127,100 from the first three months of this year. According to Fidelity Investment Data, Savers has seen a 1% increase in the first quarter of a year ago.
Many people benefited from continuing to save and invest, even when that was the last thing they wanted to do.
Regarding second quarter savings, Fidelity said the total average savings rate of 401(k) coincided with the previous quarter.
The average contribution rate for employees was 9.5%, while the contribution rate for employers was 4.8%. Together, the overall savings rate is 14.2%. This is close to Fidelity’s proposed savings rate of 15%.
2025 offers new ways to save more with your 401(k) plan
Like some Gen Xers, some baby boomers who continue to exist in the workforce can save much more with the 401(k) plan than last year if they choose to do so, based on some new rules.
From 2025 onwards, savers who become 60, 61, 62, and 63 years of calendar year will be subject to a significant “catch-up” contribution in the 401(k) plan. These savers could contribute up to $34,750 in their 2025 401(k) plan.
People under the age of 50 face a contribution limit of $23,500, up to 401(k) in 2025.
These 50 and older are allowed to “catch-up” contributions of $7,500, driving the largest contributions of many to $31,000 in 2025, unless they are in the sweet spots of the early ’60s.
Why things worked for the saver
Getting motivated to save more money can prove tricky when the stock appears to be a crater.
But Robert Bilky, CEO of Sigma Investment Counselor in Northville, Michigan, said investors who have responded to April’s weakness by selling stocks will become wealthy today.
“The key lesson from the turbulence of the past eight months is that short-term market fluctuations should not determine long-term strategies,” Bilky said.
Certainly, many people find it difficult to put more money into the stock market during their downfall.
However, similar to the April decline, short-term market movements could serve as a reminder for portfolio reviews and rebalancing, according to Bilkie.
“In fact, he said this discipline after the April dip started to increase stock allocations at favorable times for many investors.
Now, many speculate about interest rate cuts, and as President Donald Trump is urging Federal Reserve policymakers to do so, I’m wondering if we’ll see a string of interest rate cuts in the coming months.
That’s a harsh call, as the Fed’s purpose has long acted independently and never gave up its jaw from the White House.
Currently, rate cuts are expected on September 16th and September 17th at the next Fed meeting. However, it may be difficult to say whether this year or next year or next rate cut will be even greater.
Three more Fed policy meetings remain on schedule in 2025. The September meetings, the October 28th and October 29th, and the December 9th and December 10th.
“Forecasting interest rates is even more dangerous than predicting common stock prices,” Billkey said.
Regarding stocks, Bilkie said he suspects the stock market will move sideways for the rest of 2025.
When it comes to bonds, investors may want to maintain a maturity mix that has a comparable portion in short-term, medium-term and long-term bond funds, Bilkie said.
Will September bring cold weather to the stock market?
As September enters, we hear a lot of talk about Dow Jones Industry Average and the S&P 500 historically posting the worst month in September.
September got off to a choppy start in September as it closed at 45,295.81 points on September 2nd, losing 249.07 points or 0.55%.
The Dow was closed on August 28th at a record high of 45,636.90 points.
“Does that mean “take money and run”? “We asked Sam Stoval, Chief Investment Strategist at CFRA Research.
“It certainly isn’t. Especially since the market shows investors, how did it recover from the decline?”
The S&P 500 fell nearly 19% during tariff-induced selloffs in early 2025, Stovall said, but it took less than three months to recover all that was lost. The S&P 500 rose more than 30% from April 8th to the end of August.
He also said that when viewing every year since World War II, the S&P 500 is typically 80% ahead of the fourth quarter.
“As a result, history reminds us that buying is more profitable than bail,” Stovall said.
Stovall said that money markets, which are treated as safe shelters, are locked at $1 per share, so they do not lose value, but if interest rates fall in the future, the revenue received will decrease.
What should a retirement saver do now?
Luckily, many people panicked and quickly retired and put all their savings in money market funds.
“The good news is that most 401(k) investors didn’t run cover during the spring tariff-related market downdraft. They put their portfolios, so they were able to enjoy the recent benefits of the market.”
This is consistent with behavior in other market environments, she said more investors will rebalance investments and buy stocks at a lower price after the market sale, as they delegate portfolio management to targeted funds and other managed account types.
Even investors who manage their own money aren’t likely to trade much on their 401(k) plans, she said.
What should investors do now? The answer depends heavily on how close you are to retirement.
Generally, Benz plans to retire in a few years for anyone under the age of 50, so it makes sense to hold a high-stock portfolio. But look at your specific holdings and make sure your portfolio doesn’t “flock disproportionately to the biggest stocks in the US market.”
To help diversify, she said she has some exposure to small value-style companies, as well as non-US stocks that have not performed in the past decade.
Adding international index funds will provide exposure to undervalued sectors in the US today, including financial services and industrial stocks.
People over 50 said that if they don’t look closely at their asset allocation, they could invest more in stocks than they’d noticed.
That’s true given the strong run that stocks have seen overall in recent years compared to safer asset classes.
“It might seem appealing to stick to a very stocked portfolio,” Benz said. “But as you approach retirement, it’s wise to at least start moving your money into safer assets like cash and bonds.”
She says that cash and bonds probably won’t surpass stock prices for long periods of time, but if you need to spend money from your portfolio when inventory drops in value, they are buffers.
“You can spend on secure assets and don’t have to sell stocks when inventory is in the trough,” Benz said.
Benz said it generally recommends that retirees and retirees hold enough cash and bonds to cover their five to ten year planned spending from their portfolio to protect themselves from the expanded market downdraft.
Bystander cash could become a safety net for the Wild Circus on Wall Street. Even when things may seem bleak, investors with cash can afford to wait for it rather than panic.
Personal finance columnist Susan Tompoll: Contact stompor@freepress.com. Follow her on X @tompor.
