Understanding a 401(k): How it works and why it’s important
What is a 401(k) plan? Key benefits and how to maximize your savings.
Many 401(k) savers benefited by not giving into panic earlier in 2025.Cash on the sidelines can help retirees and those nearing retirement avoid panicking in a stock market meltdown.The average 401(k) balance increased 8% in the second quarter, ending June 30, from the previous quarter, according to new data from Fidelity Investments.
Retirement savers who didn’t panic earlier in 2025 ended up seeing some pretty sharp gains, instead of more pain, in their 401(k) plans in the second quarter.
And a few even ended up as millionaires.
The number of 401(k) millionaires reached an all-time high in the second quarter, according to the latest data from Fidelity Investments. Fidelity reported that 595,000 savers had at least $1 million in their 401(k) in the second quarter of 2025.
That’s up 16% from 512,000 savers who broke into seven digits on their 401(k) statements in the first quarter’s turbulent market. Many savers saw losses early in the year, though. At the end of last year, Fidelity had reported 537,000 people had become 401(k)-created millionaires.
New record highs reached for average 401(k) balances
On average, many savers didn’t need to dread taking a peek at their 401(k) statements as of late June.
The average 401(k) balance increased 8% in the second quarter ending June 30, up from the previous quarter, according to new data from Fidelity Investments. It was the highest quarterly increase since the fourth quarter of 2023.
Average 401(k) balances also reached new record highs in the second quarter with average balance at $137,800 across the country, according to Fidelity Investments.
As a benchmark, some experts recommend that you aim to have at least one times your salary set aside in retirement savings by your early to mid 30s. Saving early and consistently continues to be helpful for building a retirement nest egg.
Fidelity Investment’s 401(k) data is based on 25,600 defined contribution plans at various companies nationwide. The plans covered 24.6 million participants as of June 30.
“The fact that many of our retirement savers stayed the course through the market volatility that occurred early in the quarter — including continuing to save and not making changes to their asset allocation — played a large part in the account balance rebound many savers experienced,” according to a statement from Michael Shamrell, vice president of Workplace Thought Leadership at Fidelity Investments.
Shamrell noted that history has shown that when markets rebound, they often do so quickly.
Stocks slumped in early 2025 on tariff talks
Make no mistake, investors saw ungodly moments early in 2025, including the dramatic fallout in April on Wall Street as tariffs triggered turmoil in both the stock and bond markets.
Even in spite of the ugly headlines early in the second quarter, many retirement savers didn’t give into panic and hit the brakes.
According to Fidelity investments, only 5.5% of retirement savers made an adjustment to their 401(k) asset allocation in second quarter. Among those in this group, 82.5% — or about 8 out of 10 employees — made only one change.
The latest update from Fidelity is more reassuring than one reported a few months ago.
In June, Fidelity reported that average 401(k) retirement account balances fell 3% from late last year through the first three months this year to $127,100. Savers still saw a 1% gain in balances from the first quarter a year ago, according to Fidelity Investment data.
Many benefited by continuing to save and invest, even when that’s the last thing they wanted to do.
When it comes to savings in the second quarter, the total average 401(k) savings rates remained consistent with the previous quarter, which was at a record high, according to Fidelity.
The average employee contribution rate was 9.5% and the average employer contribution rate was 4.8%. Combined together, you’d hit a 14.2% savings rate overall, which is close to Fidelity’s suggested savings rate of 15%.
2025 offers a new way to save more in 401(k) plans
Some baby boomers who continue to be in the workforce, as well as a few Gen Xers, are able to save far more this year in 401(k) plans than last year if they chose to do so, based on some new rules.
Beginning in 2025, a substantially higher “catch-up” contribution in 401(k) plans can apply to savers who turn age 60, 61, 62 and 63 during the calendar year. These savers could contribute up to a maximum of $34,750 in a 401(k) plan in 2025.
Those younger than 50 years old face a maximum 401(k) contribution of $23,500 limit in 2025.
Those 50 and older are allowed a “catch-up” contribution of $7,500 that would drive the maximum contribution for many to $31,000 in 2025 — unless you’re in the sweet spot for some savers in their early 60s.
Why things worked out for some savers
Getting motivated to save more money could prove tricky when it seems like stocks are cratering.
But Robert Bilkie, CEO of Sigma Investment Counselors in Northville, said investors who reacted to April’s weakness by selling stocks would be significantly less wealthy today.
“The key lesson from the turbulence of the past eight months is that short-term market fluctuations should not dictate long-term strategy,” Bilkie said.
Many people, admittedly, find it tough to put more money into the stock market during a downfall.
Yet, Bilkie said, short-term market movements, like the decline in April, can serve as a reminder to review and rebalance portfolios.
“In fact,” he said, “following this discipline after the April dip would have led many investors to increase their stock allocations at a favorable time.”
Right now, many are speculating about interest rate cuts, and wondering hopefully if we’re going to see a string of interest rate cuts in the coming months — as President Donald Trump has been pushing the Federal Reserve’s policymakers to do.
It’s a tough call, as the Fed’s objective has long been to act independently and not give into any jawboning from the White House.
A rate cut is now expected at the Fed’s next meeting Sept. 16 and Sept. 17. But it may be hard to say how many more rate cuts would follow this year or next.
In 2025, three more Fed policy meetings remain on schedule: The September meeting, a meeting on Oct. 28 and Oct. 29, and a meeting Dec. 9 and Dec. 10.
“Forecasting interest rates is even more treacherous than forecasting common stock prices,” Bilkie said.
As for stocks, Bilkie said, he’d suspect that the equity markets move sideways through the rest of 2025.
As for bonds, Bilkie said, investors may want to keep a mix of maturities, essentially having an equal portion in short term, intermediate term, and long-term bond funds.
Will September bring a chill to the stock market?
Going into September, we’re hearing much buzz about how the Dow Jones Industrial Average and the S&P 500 historically have posted the worst month of the year in September.
September got off to a choppy start, as the Dow Jones Industrial Average lost 249.07 points or 0.55% on Sept. 2 to close at 45,295.81 points.
The Dow closed at a record high of 45,636.90 points on Aug. 28.
“Does that mean ‘Take the money and run?’ ” asked Sam Stovall, chief investment strategist for CFRA Research.
“Certainly not, especially since the market’s shown investors how swiftly it recovers from declines.”
The S&P 500 had nearly a 19% fall during tariff-induced selloff earlier in 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 the April 8 low through the end of August.
In addition, he said, the S&P 500 has typically advanced 80% of the time in the fourth quarter if you look at every year since World War II.
“As a result, history reminds us that it has been more profitable to buy, rather than bail,” Stovall said.
Money markets, which are treated as safe havens, won’t lose value since they are fixed at $1 per share, Stovall said, but the income received will go down if interest rates fall in the future.
What should retirement savers do now?
Fortunately, many did not panic and rush to put all their retirement savings in money market funds.
“The good news is that most 401(k) investors didn’t run for cover during the tariff-related market downdraft in the spring. They stood pat with their portfolios, so they’ve been able to reap the market’s recent gains,” said Christine Benz, author of “How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.”
That’s consistent with behavior in other market environments, she said, as more investors delegate portfolio management to target-date funds and other managed account types, which typically rebalance investments and buy stock at lower prices after a market selloff.
Even investors who manage their own money don’t tend to trade much in 401(k) plans, she said.
What should investors do now? The answer depends a great deal on how close you are to retirement.
Generally, Benz said, it makes sense for anyone under age 50 to hold a stock-heavy portfolio as they plan for retirement years from now. But take a look at specific holdings to make sure that your portfolio isn’t “disproportionately huddled in the U.S. market’s biggest stocks, which are arguably expensive right now,” Benz said.
To help diversify, she said, have some exposure to smaller and value-style companies, as well as non-U.S. stocks, which haven’t performed as well over the past decade.
Adding an international index fund gives you exposure to sectors that are underrepresented in the United States today, she said, such as financials services and industrials stocks.
Anyone who is older than 50 could be more heavily invested in stocks now than they realize, Benz said, if they haven’t looked closely at their asset allocation.
That’s true given the strong run that stocks have seen overall in recent years relative to safer asset classes.
“It might seem tempting to stick with a very stock-heavy portfolio,” Benz said. “But as you get closer to retirement, it’s wise to start moving at least some money into safer assets like cash and bonds.”
Cash and bonds, she said, probably won’t outperform stocks over long periods of time, but they’re a buffer if you need spending money from your portfolio when stocks have fallen in value.
“You can spend from your safe assets and not have to sell your stocks when they’re in a trough,” Benz said.
Benz said she typically recommends that pre-retirees and retirees hold enough cash and bonds to cover from five years to 10 years of planned spending out of one’s portfolio to protect themselves against an extended market downdraft.
Cash on the sidelines can be the safety net for the wild circus on Wall Street. Even when things might look bleak, investors with cash on hand can afford to wait it out and not panic.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.