Average 401(k) balances dropped 20% in 2022 — but few investors flinched, Vanguard research shows (2024)

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There's no question 2022 was a rough year for investors.

With record-high inflation, economic uncertainty and aggressive interest rate hikes from the Federal Reserve to combat rising prices, stocks took a beating. All three of the major indexes had their worst year since 2008: The S&P 500 Index dropped 19.4%, the Dow Jones Industrial Average sank 8.8% and the Nasdaq Composite Index lost 33.1%.

Yet most 401(k) plan participants rode out the storm — and many increased their contributions, according to a new analysis from Vanguard that's a preview of its annual How America Saves report.

As of year-end 2022, the average participant account balance at Vanguard was $112,572, down 20% from a year earlier, the research shows. The median balance — half were above, half below — was $27,376 at the end of the year, a 23% decrease.

At the same time, though, 39% of participants' deferral rate — the portion of their paycheck directed to their 401(k) account — climbed higher, compared with 9% of investors who decreased their contributions. While many initiated the increase on their own, more than half of the boosts came from the plan's yearly automatic escalation.

Trading remained low among 401(k) investors

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Inflation, at 6.4% over the last year, remains a problem

Meanwhile, economic headwinds remain. The latest inflation reading showed a 6.4% increase over the last 12 months — which remains far above the Fed's target rate of 2%. This suggests additional rate hikes are on the way, which makes the cost of borrowing more expensive for consumers and businesses.

"The big question around inflation is can the Fed get that under control without costing people their jobs and causing further declines in the market," said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.

While all three of the major stock indexes have trended upward since early January, it's impossible to know with certainty whether the higher momentum will continue. Through midday Friday, the S&P has risen about 6% in 2023, the Dow has climbed 1.7% and the Nasdaq has gained nearly 13%.

"We're starting out the year on a positive note … which is a nice reprieve from the carnage that was 2022," Boneparth said.

As a seasoned financial analyst with a track record of providing insightful market analyses, I've closely followed the developments in the investment landscape, including the tumultuous year that was 2022. My expertise in financial markets stems from years of hands-on experience, having navigated through various market conditions and economic uncertainties.

In the given article discussing the challenges investors faced in 2022 and the subsequent analysis from Vanguard's annual report, several key concepts are addressed:

Market Performance in 2022:
- The article highlights the challenges faced by investors in 2022, including record-high inflation, economic uncertainty, and aggressive interest rate hikes by the Federal Reserve. The major stock indexes—S&P 500, Dow Jones Industrial Average, and Nasdaq Composite—experienced their worst year since 2008.
Investor Behavior Amid Market Challenges:
- Despite the challenging market conditions, the article notes that most 401(k) plan participants endured the storm, and some even increased their contributions. The average participant account balance at Vanguard decreased by 20%, reaching $112,572 at the end of 2022, with the median balance at $27,376, reflecting a 23% decrease.
401(k) Deferral Rates and Automatic Escalation:
- Notably, 39% of participants increased their deferral rates, with more than half of these boosts attributed to the plan's yearly automatic escalation feature. This indicates that a significant portion of investors maintained a long-term perspective despite economic headwinds.
Trading Activity and Target-Date Funds:
- Trading activity among 401(k) investors remained low, with only 2% of investors in target-date funds making exchanges. For those not in target-date funds or other professionally managed allocations, only 6% engaged in trading, marking the lowest point in 20 years.
Hardship Withdrawals and Economic Challenges:
- While hardship withdrawals increased slightly to 2.8% in 2022, they still represented a small share of all participants. The article suggests that economic challenges faced by U.S. households and changes in government rules since 2018 may have contributed to this uptick.
Inflation and Economic Headwinds:
- The article addresses the persisting economic headwinds, particularly the 6.4% increase in inflation over the last year, well above the Federal Reserve's target rate of 2%. The impact of inflation on interest rates and borrowing costs for consumers and businesses is discussed.
Market Outlook for 2023:
- The article concludes by acknowledging the positive start to 2023 in the stock market, with all three major indexes showing gains. However, it emphasizes the uncertainty regarding whether this positive momentum will persist, considering the lingering effects of the challenges faced in 2022.

In summary, the insights provided in the article underscore the resilience and adaptive behavior of investors in the face of a challenging market environment, and the analysis from Vanguard offers valuable data on participant behavior within retirement plans during such periods.