401(k) Status Report: Concerns Over Decreased Savings and Increased Withdrawals, Yet Positives Remain

Retirement savers have faced a year of contrasting fortunes. While many have seen their 401(k) balances gradually recover from the downturn that began in 2022, others have been hit hard by inflation, leading to an increase in tapping into retirement funds

Fidelity Investments’ latest quarterly review of over 45 million retirement accounts has detailed this complex scenario.

The third-quarter data reveals a mixed picture. Average balances in 401(k) and 403(b) accounts showed a slight decline from the previous quarter, with 401(k) balances dropping by 4% to $107,700 and 403(b) accounts by 5% to $97,200. 

Similarly, Individual Retirement Accounts (IRAs) decreased by 4% to $109,600. Despite these quarterly decreases, there was an 11% year-over-year increase in 401(k) and 403(b) balances, and IRAs saw an 8% rise.

A positive note in the report is the total savings rate, combining employee and employer contributions, which rose to 13.9%, slightly higher than last year. 

This suggests that despite market uncertainties, people are consistently contributing to their retirement accounts. 

Furthermore, most employers continue to match employee contributions, providing a crucial boost to retirement savings.

However, the report also highlights concerning trends. Fidelity noted an uptick in retirement plan loans and hardship withdrawals, primarily driven by inflation and living cost pressures.

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Financial Struggles Reflected in 401(k) Loan Increase

401(k)-status-report-concerns-over-decreased-savings-increased-withdrawals
Retirement savers have faced a year of contrasting fortunes. While many have seen their 401(k) balances gradually recover from the downturn that began in 2022, others have been hit hard by inflation, leading to an increase in tapping into retirement funds.

In the third quarter, 2.8% of retirement participants obtained a loan using their 401(k), a slight increase from 2.4% a year earlier. 

The percentage of workers with outstanding loans rose to 17.6%, up from 16.8% in the third quarter of 2022.

In-service withdrawals, which are subject to taxes and potential penalties, also increased. Fidelity reports that 3.2% of 401(k) participants took an in-service withdrawal, up from 2.7% a year ago. 

Hardship withdrawals rose to 2.3% of workers, from 1.8% in the same period in 2022, with medical expenses and avoiding foreclosure or eviction as the primary reasons.

The report underscores the dilemma faced by many savers: the need to balance long-term retirement goals with immediate financial challenges. 

Fidelity’s Mike Shamrell advises those considering tapping into retirement savings to carefully weigh the options and consult with plan administrators or human resources departments.

With the ongoing evolution of the financial landscape, retirement savers are reminded of the importance of staying informed and making considered decisions to ensure their future financial security.

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