American Citizens’ 401(k) Accounts Lost a Fifth of Their Value in 2022

Increase in hardship withdrawals coincide with a decline in bank balances as Americans struggle with economic uncertainties

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The balances of 401(k) retirement accounts have declined in 2022, with the share of participants who are making “hardship withdrawals” hitting a “new high,” according to a recent report by investment firm Vanguard.

“In 2022, the average account balance for Vanguard participants was $112,572; the median balance was $27,376. Vanguard participants’ average account balances decreased by 20 percent since year-end 2021,” Vanguard’s “How America Saves 2023” report (pdf) said. Last year’s average and median account balances were the lowest in three years. Many participants also withdrew from their 401(k) accounts early, with hardship withdrawal activity in 2022 rising higher than anytime previously.

A hardship withdrawal from a 401(k) account is done when there is an “immediate and heavy financial need,” according to the Internal Revenue Service. Vanguard’s data show that 2.8 percent of plan participants made hardship withdrawals in 2022, up from 2.1 percent in 2021 and hitting the highest level in five years.

“The increase in hardship withdrawals may signal that some households faced additional financial stress,” the report said. Accounting for 36 percent of withdrawals, the number-one reason for hardship withdrawals last year, from 401(k) accounts, was to avoid foreclosure/eviction.

Thirty-two percent of hardship withdrawals were done to cover medical expenses, 15 percent to purchase or repair a primary residence, and 13 percent to pay for tuition expenses.

Meanwhile, though non-hardship withdrawals dropped from 4 percent in 2021 to 3.6 percent in 2022, it was still the second-highest level in five years.

Declining Account Balances

The Vanguard report claims that the decline in the balances of 401(k) accounts in 2022 was “driven primarily by the decrease in equity and bond markets over the year.”

At the stock market, the benchmark S&P 500 Index fell by 19.4 percent in 2022, the biggest decline since the financial crisis in 2008–09. The crash wiped out roughly $8 trillion in market cap. In the bond market, the intermediate-term Treasury bonds dipped 10.6 percent last year.

The fall in stock and bond markets last year came as the Federal Reserve raised its benchmark interest rates from near zero to a range of 4.25–4.5 percent in its attempt to control inflation.

The decline in the size of retirement accounts was seen in other institutions offering 401(k) plans. In February, Fidelity Investments, the biggest provider of 401(k) plans in the United States, revealed that the average 401(k) account balance dropped from $130,700 in fourth quarter 2021 to $103,900 in fourth quarter 2022, a decline of over 20 percent.

Struggling to Save

While 401(k) account balances have fallen, bank savings of American citizens have also dropped in recent years as they struggle with inflation and an uncertain economy.

According to data from the Federal Reserve Bank of St. Louis, the personal saving rate was 4.1 percent in April 2023. It dipped below 5 percent in January 2022 and has remained below the level for 15 months. The last time the personal saving rate dipped below 5 percent was in August 2009.

According to a Feb. 23 Annual Emergency Savings survey by Bankrate, 39 percent of U.S. adults had “less savings” compared to a year ago, with 10 percent having “no savings.”

“It’s clear that the less-than-optimal economy, including historically high inflation coupled with rising interest rates, has taken a double-edged toll on Americans. Many have resorted to tapping their emergency savings if they have it, or have taken on credit card debt, or some combination,” said Mark Hamrick, a senior economic analyst at Bankrate.

In May, the Federal Reserve Board published its report, “Economic Well-Being of U.S. Households in 2022,” which revealed that the percentage of American adults who reported that they were financially worse off in 2022 jumped to 35 percent—the highest level since 2014.