401(k) Balances Plummeted in 2022

​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's savings 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.