Most retirement savers are ‘staying the course’ — even if they’re totally stressed

Here’s what retirement savers have done in response to this economic environment, according to investment firms that house their accounts: 

Changes to asset allocation and contributions 

Fidelity found the total savings rate for 401(k) plans remained high at nearly 14%, just 1 percentage point short of what Fidelity and many financial advisers suggest at 15% of total income, according to its second quarter data of its investors. The total number of IRAs increased by the double digits since the second quarter of last year — and younger generations were the force behind that, Fidelity said. The number of accounts opened by members of Gen Z jumped 87% compared with the second quarter of 2021, and 24% for millennials. 

Of course, market volatility did push these investors’ account balances downward, but not as much as market declines in the second quarter, Fidelity said. The average IRA balance was $110,800 in the second quarter, down 17.9% from the same time last year, while 401(k) average balances dropped to $103,800 in the same quarter, down 20% from a year before. The average 403(b) account balance was $93,300, an 18% decline from a year ago. 

A majority of retirement investors did not make changes to their asset allocation, with only 5% of 401(k) and 403(b) holders making adjustments, Fidelity found. Of the investors who did make a change, 85% only made one, and many of those changes were to shift savings to conservative investments. 

Vanguard said just 4.3% of its defined contribution participants traded between Jan. 1 and June 30, and that trading activities dropped relative to 2020 and 2021. Comparatively, 5.5% of participants traded during the same time last year, and 6% of those traded between January and June 2020. Of the trades, a majority of participants moved their assets to equities instead of fixed incomes, the company said. 

Principal, another investment firm that oversees retirement accounts, said about 2.44% of participants made a transfer — a 13% increase from the same time last year. But a majority — 86.2% — of its participants maintained their contribution rates.  

Battle financial stress

Charles Schwab saw similarly good behavior from its retirement investors — 98% of participants maintained their 401(k) savings rate last month, just as they had been throughout the pandemic, according to Schwab Retirement Plan Services’ data of participants.

“In this difficult economic environment, workers have found ways to reduce spending and continue contributing to their retirement,” said Nathan Voris, director of investments, insights and consultant services at Schwab Retirement Plan Services.

But only 15% of employees said they’ve been able to avoid financial stress from volatility, inflation and other factors, Voris said, and participants are turning to human advice for assistance. Call volume for Schwab Retirement Plan Services rose an average of 9% since January.

Since 2021, more investors have also been turning to personal finance and retirement planning content, seeking information about Social Security claiming, healthcare costs and withdrawal strategies, said Josh Dietch, vice president and head of retirement thought leadership at T. Rowe Price
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Loans and withdrawals 

Although contributions remain steady, financial stress is evident, Schwab’s Voris said. Loans and withdrawals from 401(k) plans are increasing: the number of loans rose 21% between January and July, while hardship withdrawals jumped 25% compared with the same time the year before. 

Fidelity said only 2.4% of its participants initiated a loan in the second quarter of 2022. The number of participants with outstanding debt ticked downward to 16.7% in the second quarter from 18.9% during the same time frame in 2020. The firm had seen a decrease in initiated 401(k) loans and outstanding loans in the first quarter of 2022 as well. 

Principal found loan requests were up 69% between Jan. 1 and June 30, compared with the same time in 2021, but the average amount was 8.25% lower. Hardship withdrawals doubled, with the average amount 28% lower. Some of the increased loan and hardship withdrawals could be attributed to the migration of accounts from Wells Fargo Institutional Retirement & Trust.  

Other impacts 

Americans may be managing their financial stress well by keeping their contributions intact for the most part and avoiding emotional trades, but there are other ways the current economic environment and the yearslong pandemic have affected their retirement plans.

“On the surface, it looks like all is well,” he said. Underlying challenges, however, include switching jobs, or starting retirement accounts with low contribution rates. “When people change jobs, they tend to start saving at lower rates when they re-enroll, so there is an effect on the long-term,” T. Rowe Price’s Dietch said. 

Participants may have been auto-enrolled, or they might have benefited from auto-escalation, which is when the plan automatically increases their contribution rates every year. Each time investors start a new job though, they restart the process, and may not contribute at the same rate they did at a previous job, he said. “What we saw for those who are employed, the average deferral rate was 8.5% but for newly hired, it was less than 6%,” he said.