Average 401(k) balances are up from last year, but so are hardship withdrawals

There’s good news and bad news about the state of retirement savings in 2023 according to a new report from Bank of America.

While some Americans are feeling optimistic and have boosted their 401(k) balances, others are struggling and been forced to take hardship withdrawals, depleting their retirement provisions.

Average balances so far in 2023 have increased by almost 10% or $7,250 based on monitoring of plan participants' behavior in BofA record-keeping clients' employee benefits programs, comprising more than 4 million participants as of June 30.

On the downside, there has been a 36% spike in the number of people taking hardship withdrawals from their 401(k) plans compared to a year ago, along with a rise in the share of people borrowing from their workplace plan (2.5% in Q2 versus 1.9% in Q1).

"The data from our report tells two stories — one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals," said Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America.

Overall, the contribution rate was in line with last year's at 6.5% in the first half of 2023. And more people increased their contributions (10.2%) than decreased them (2.2%) in the second quarter, led by younger Americans (19% of Gen Z and 11% of millennials).

FEELING THE PINCH

BofA’s Participant Pulse report also found that the average financial wellness score for employees was 56 out of a possible 100, down one point from 57 at year-end, with women trailing men (52 vs. 59).

While people may be feeling the pressure of inflation and interest rate hikes, Sabbia added that cutting back on 401(k) contributions should be avoided.

"This year, more employees are understandably prioritizing short-term expenses over long-term saving,” she noted. “However, it's critical that employees continue to invest in life's biggest expense — retirement."

HEALTH SAVINGS ACCOUNTS

The research also asked participants about their health saving accounts and found that average balances increased from $3,931 to $4,397 in the first six months of 2023, a rise of almost 12% year-over-year.

Nearly 4 in 10 account holders contributed more than they withdrew in Q2, consistent with year-end 2022. 

On average, only 12% of account holders invested their HSAs for future growth in Q2, with baby boomers leading at 15%. In addition, more men invested than women (18% vs. 11%).