In the race to retire comfortably, California's Silicon Valley is winning, with San Jose and San Francisco tied for the highest total contribution rates to 401(k) retirement plans, according to research from Fidelity Investments, the largest provider of 401(k) plans in the U.S.
The study of 13 million 401(k) savers found that participants in San Jose and San Francisco typically saved 14.6 percent of their annual salary, including both the worker and the employer contributions. Coming in second place was Raleigh, North Carolina, another technology employer hot spot.
Highest total contribution rates
|New York metro (including northern New Jersey)||13.6|
Source: Fidelity Investments
Not everybody in these areas is saving a lot because of the generosity of an employer. San Jose led the list of cities with low employer contribution levels, at only 3.5 percent. The cities with the highest employer contribution rates -- Richmond, Virginia, and Columbus, Ohio -- weren't on the list of places where people saved a lot, even though employers in these two cities kicked in an average of 5.8 percent and 5.7 percent, respectively.
No, the reason for this great retirement planning is probably simpler than that. The cities at the top of the savers list are all places where many workers earn a generous salary. For example, last fall, recruitment site Glassdoor reported that software engineers in the San Francisco Bay Area, which includes San Jose, earn the highest average annual base salary in the country -- $111,885 -- and 17 of the 25 highest-paying companies are based in the San Francisco Bay Area.
Earning a lot may not be the only factor, says Meghan Murphy, a director at Fidelity Investments. "Obviously the salaries are higher and people are likely to be able to save a little more, but the cost of living in those places is higher as well, so there is a balancing of priorities."
But having a big paycheck every week helps.
Across the country, the average joint employer and employee contribution rate is 12.4 percent, Murphy says, suggesting that both employees and employers could use this information to benchmark themselves.
She also points out that, importantly, 401(k) savers can preserve their nest eggs by refraining from borrowing from their accounts. McAllen, Texas, and Riverside, California, have the highest rate of outstanding 401(k) loans -- with 33 percent and 32 percent of savers, respectively, in debt, a dubious distinction. Borrowers not only lose out on the earnings their savings might have generated, they also repay the loan in after-tax dollars, and when they ultimately withdraw the money in retirement, they'll pay taxes again.
"It's a triple whammy," Murphy says. "Most people don't understand that."