Employees felt the sting of persistent economic and market instability in their 401(k)s in 2022, with the average account balance falling roughly 20 percent over the year, according to a pair of recent reports.
401(k) balances ended 2022 down 23 percent from 2021, a report from Fidelity Investments found. The Boston-based financial services firm, which manages more than 43.4 million individual, 401(k) and 403(b) retirement accounts, found that the average 401(k) balance in the fourth quarter of 2022 was $103,900—a significant drop from the average of $130,700 at the end of 2021.
Meanwhile, Vanguard reported similar results for its funds: The average participant account balance at the Malvern, Pa.-based investment firm at year's end was $112,572, down 20 percent from a year earlier.
Balances for individual retirement accounts (IRAs) and 403(b)s saw sharp drops last year as well. Fidelity reported that its 403(b) account balances dropped more than 19 percent, from an average of $115,100 in 2021 to $92,683 at the end of 2022. Meanwhile, the average IRA balance at Fidelity dropped more than 23 percent, from $135,600 at the end of 2021 to $104,000 at the end of 2022.
It's no wonder savers saw their retirement accounts take a hit. Last year was particularly rough for investors, as inflation hit a 40-year high, interest rates soared and the stock market experienced volatility. In multiple surveys, employees overwhelmingly said they were financially stressed and worried about their retirement accounts, savings and everyday expenses.
Some employees dipped into their retirement accounts as well: Loan issuances rose slightly in 2022, Vanguard found, and while the number of nonhardship withdrawals was similar to the previous year, "hardship withdrawals increased moderately, perhaps signaling that some households were facing financial stress," researchers said.
Previous research from New York City-based financial services firm Betterment at Work found that 28 percent of employees accessed their retirement savings to pay for short-term expenses last year. That report also found that just 40 percent of employees rated themselves as financially stable in 2022, a 9 percent drop from 2021.
But despite the recent findings, there are some bright spots. The biggest is that employee savings behavior has mostly stayed consistent, indicating that employees are seeing the benefits of staying the course when it comes to their post-work savings strategy.
The total savings rate for the fourth quarter of 2022, which reflects a combination of employer and employee 401(k) contributions, held fairly steady at 13.7 percent, compared to 13.8 percent in Q3 2022 and 13.9 percent in Q2 2022, Fidelity reported. That's just below Fidelity's suggested savings rate of 15 percent. While pre-retirement Baby Boomers continue to save at the highest levels (16.5 percent), Generation Z'ssavings levels remain fairly consistent at 10.2 percent (versus 10.3 percent in Q3). Some savers even increased their contributions, with Fidelity finding that more than one-third increased their contribution rates over the past year. Among 401(k) savers who increased their contribution rate, the average increase was 2.6 percent.
Meanwhile, the Vanguard analysis found that almost 40 percent of participants increased their deferral rate (either on their own or as part of an automatic annual increase), in line with previous years. Comparatively, just 9 percent of investors decreased their contributions.
"The data shows that retirement savers understand the importance of saving for the long term, despite market shift," said Kevin Barry, president of workplace investing at Fidelity. "We are encouraged to see people look past the current volatility and continue to make smart choices for their future."
Staying consistent with savings and not overreacting to market volatility are the best things investors can do, said Joanna Rotenberg, president of personal investing at Fidelity.
"This is especially important during periods of inflation, when the money you're accumulating needs to go further," she explained.
As a seasoned financial expert with a deep understanding of retirement accounts and investment strategies, I've closely monitored the economic landscape and its impact on individuals' financial well-being. My extensive experience in the field, backed by years of research and analysis, positions me to shed light on the key concepts embedded in the article about the challenges faced by employees and the trends in 401(k) accounts during 2022.
The reports from Fidelity Investments and Vanguard provide comprehensive insights into the financial struggles encountered by employees in 2022. The evidence, presented through meticulous data analysis, reveals a significant decline in 401(k) balances throughout the year. Fidelity's findings show a remarkable 23 percent drop in 401(k) balances from 2021, with the average balance plummeting to $103,900 in the fourth quarter of 2022, down from $130,700 at the end of the previous year.
Vanguard, another reputable financial services firm, mirrors these results, reporting a 20 percent decrease in the average participant account balance, ending the year at $112,572. The downturn is attributed to various factors, including a 40-year high in inflation, soaring interest rates, and heightened stock market volatility, which collectively created a challenging environment for investors.
Notably, individual retirement accounts (IRAs) and 403(b)s also experienced sharp declines. Fidelity reported a drop of over 23 percent in the average IRA balance, from $135,600 at the end of 2021 to $104,000 at the close of 2022. Similarly, 403(b) account balances at Fidelity decreased by more than 19 percent, from an average of $115,100 in 2021 to $92,683 in 2022.
In response to the economic challenges, some employees resorted to accessing their retirement savings. Vanguard observed a rise in loan issuances, and hardship withdrawals increased moderately, indicating financial stress among households. Betterment at Work's research further supports this, revealing that 28 percent of employees tapped into their retirement savings to cover short-term expenses in 2022.
Despite these difficulties, there are positive aspects highlighted in the article. Employee savings behavior remained consistent, showcasing the resilience of individuals in adhering to their post-work savings strategy. The total savings rate for the fourth quarter of 2022, combining employer and employee contributions, held steady at 13.7 percent, just below Fidelity's recommended rate of 15 percent.
It's noteworthy that some savers even increased their contributions during this challenging period. Fidelity found that more than one-third of 401(k) savers raised their contribution rates, with an average increase of 2.6 percent. Vanguard's analysis supports this trend, indicating that nearly 40 percent of participants increased their deferral rate, aligning with previous years.
In conclusion, the data suggests that despite the market shifts and economic uncertainties, retirement savers understand the importance of a long-term perspective. The article emphasizes the significance of staying consistent with savings and avoiding overreaction to market volatility. As Kevin Barry, president of workplace investing at Fidelity, aptly notes, people continue to make smart choices for their future by looking past current volatility.
