The 401(k) Millionaire: A Ridiculous Idea?

Unconvinced Last month, Fortune's Stephen Gandel took Fidelity to the woodshed.

The company has been touting its growing number of 401(k) millionaires--72,000 at last count. "You don't have to be making a million to save a million," the company chirps in "Five habits of 401(k) millionaires." Indeed, "Saving $1 million for retirement might seem like a tall order, but our 401(k) participants have done it without earning more than $150,000 per year."

The media blitz has served Fidelity well, spawning articles such "How to be a 401(k) millionaire" (CNN), "Secrets of the 401(k) millionaires" (MarketWatch), and "How to save a million bucks for retirement" (USA Today). Gandel, however, wasn't buying:

"It’s easy. So easy that of the roughly 13 million 401(k) accounts that Fidelity administers, a total of 72,379, or just 0.6% of them, have a balance of more than $1 million. This is, as Fidelity reported, up from 0.3% two years ago. Congrats! Among people who made less than $150,000 per year, the number of 401(k) millionaires was much, much lower, around 1,100. The rest [of the 401(k) millionaires] made a lot more, over $350,000 a year, making the fact that they were able to save $1 million over 34 years sound a lot less impressive, and probably not even enough for someone making $350,000 to retire on.

"401(k)s rock!”

To adjudicate the dispute, let’s walk through Fidelity’s five habits.

1) Start saving early. Gandel has no quarrel with starting early. Who could? However, he gets sidetracked by the issue of company tenure.

“Fidelity found that, on average, 401(k) millionaires had worked for the same company for 34 years. And that’s the average! How likely are you to stay with the same job for 34 years or longer? Not very.”

That’s not a strong argument. As Fidelity only has information on the 401(k) plans that it administers, it can’t combine balances from Fidelity and non-Fidelity plans. What’s more, the company did not attempt to combine balances from within its own plans. Thus, the only possible millionaires are those who have worked for decades at a single place.

Meaning that there are far more 401(k) millionaires out there than Fidelity’s study suggests. After all, the single employee with multiple plans is just the tip of the missing iceberg. The bulk of the ice lies with married couples, as each person is tallied separately when assessing 401(k) assets--not just with Fidelity’s study, but with virtually all retirement-related articles. A household million is a household million, regardless of whether it comes from one wage earner or two.

2) Contribute a minimum of 10% to 15%. Well, that's no fun. Gandel, unsurprisingly, doesn't much care for this advice, because who does? It feels a lot better to have a traditional pension plan that consumes money that one is never given than it does to sign away salary through a 401(k) plan. But he doesn't really argue the point that high savings rates lead to higher balances. That, as my mother would have said, is a Mona Lisa (her shorthand for an easy question, as in "Who painted the Mona Lisa?").

Fidelity notes that its average 401(k) millionaire has a 14% contribution rate. Gandel scoffs, suggesting that the normally suggested figure of 10% is plenty aggressive, given that the current national average is 6%. He is correct, in a sense--not many people will contribute 15%. Then again, not many people will become 401(k) millionaires, either. It’s not for everybody.

3) Meet your employer match. The two parties appear to disagree on the facts. Fidelity states that "96% of all 401(k) participants are in a plan that offers some type of employer contribution." In contrast, Gandel cites a survey showing that "only 58% of companies that offer a 401(k) matched their contributions at all."

Do you see what’s going on here? Fidelity counts participants, while Gandel counts companies. This relates to a longtime hobbyhorse for this column: The quality gap between large-company and small-company 401(k) plans. Large plans are better across the board, including with company matches. Nearly every large company offers one, which is why Fidelity’s participant count is so high, but half of small companies do not, which is why Gandel’s corporate count is low.

Fidelity finds that 28% of its 401(k) millionaires’ balances owe to employer contributions. Given a 14% employee contribution rate, this implies an employer match of 5.4%--well above the 3% average for the typical large company, never mind what small companies offer. As Gandel writes, "Oh well."

4) Consider mutual funds that invest in stocks. Unsurprisingly, Fidelity's 401(k) millionaires held 75% of their assets in equities. Collectively, they were relatively young (47 years old entering the time period of the study) and relatively wealthy, so they figured to have a lot in stocks. Surprisingly, though, they dusted the stock market over the same period, gaining 4.8% annually as opposed to 2.0% for the Wilshire 5000.

Gandel scoffs that Fidelity’s advice translates to "Be Warren Buffett." While no doubt the millionaire list does carry some selection bias, so those employees who invested particularly brilliantly (or fortunately) ascended to the top, there’s more to the surprise than that. The time period studied did not favor blue chips, which were handily beaten by both small-cap stocks and bonds. In fact, somebody with no stocks whatsoever, 50% in the Barclays U.S. Aggregate Bond Index, and 50% in cash would have roughly matched what the millionaires accomplished.

So, score no points for either Fidelity or Gandel. While holding stocks for the long term is generally good advice--my portfolio is at 95%, which makes me a true (if rash) believer--this particular study does not support the conclusion. The headline instead should have been about the prudence of diversification. As for Gandel’s take, the target-date fund

5) Don't cash out when changing jobs. Gandel writes, "Lastly, Fidelity says not to borrow from your 401(k) or cash it out. That may sound easy enough, but it's not for most people."

This returns us to a previous item: Being a 401(k) millionaire isn’t for everybody. Yes, it’s tempting to spend that 401(k) balance when leaving a job. It could cover moving expenses, a car, or perhaps some travel. From my perspective, there’s nothing wrong with that--who am I to write how people should spend their money? (One of my former college roommates traveled the world for a year on his own dime while in his 20s, a decision that he has not regretted.) That is not how millionaires next door tend to behave, however.

On the whole, my sympathies lie mostly with Fidelity's arguments. That is no shocker, as Gandel confesses to once writing that 401(k)s are a "lousy idea, a financial flop, a rotten repository for our retirement reserves," while I have been quite complimentary of large-company 401(k)s. But I'm glad that Gandel raised those issues, as they are certainly worth discussing.

Next column, I'll run through some numbers. Becoming a 401(k) millionaire may not be a ridiculous idea, but is it very realistic? If so, under what conditions?

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.