Retirement accounts surged on strong 2023 markets: Vanguard

Despite a year of uncertainties that included volatile markets and shifting economic policies, American workers have largely stuck to their long-term retirement goals by maintaining steady saving habits, according to new Vanguard research.

In a preview of its How America Saves report, which analyzed data on nearly 5 million defined-contribution plan participants in 2023, the indexing giant found a notable 19 percent increase in average account balances, primarily driven by positive market performance.

Despite a complex economic environment marked by the highest mortgage rates in over two decades and record-high household debt, the equity and bond markets concluded 2023 with gains of 25 percent and 5 percent, respectively.

Against that backdrop, the report found only 5 percent of non-advised participants engaged in trading activities – a record low for the Vanguard study.

Positive market performance helped drive a significant uptick in account balances, which reached $134,128 at year-end 2023. The median balance also surged by 29 percent over the previous year to $35,286.

Professionally managed allocations also held strong, with 66 percent of participants invested through target-date funds or other vehicles.

“Participants with [professionally managed allocations] have their entire account balance invested either in a single target-date, target-risk, or traditional balanced fund, or in a managed account advisory service,” the report said.

A record 64 percent of all contributions were directed into target-date funds, suggesting a growing trust in these investment vehicles.

Automatic enrollment in retirement plans also saw a steady increase, with 59 percent of Vanguard plans adopting the feature by the end of 2023. Larger plans – those with at least 1,000 participants – were more likely to implement automatic enrollment, with a 77 percent adoption rate.

The report showed an evolution in retirement plan design, with 60 percent of plans setting the default deferral rate at 4 percent or higher and nearly 70 percent incorporating an annual escalation feature to automatically increase deferral percentages.

Encouragingly, 43 percent of participants raised their deferral rates, marking the highest level since Vanguard began tracking this metric. According to Vanguard, 15 percent of participants voluntarily increased the percentage of their paycheck they contributed to the plan last year, while an additional 28 percent saw their deferral percentage rise due to automatic annual increases.

While loan usage saw a 12 percent uptick from 2022, it remains below pre-pandemic levels. Possibly as a result of financial strains for some workers, hardship withdrawals saw a modest increase, with 3.6 percent of participants initiating a withdrawal in 2023, up from 2.8 percent the previous year.

In terms of investment preferences, equity allocations remained stable at 74 percent, with 79 percent of plan contribution dollars invested in equities in 2023 – a modest uptick from 77 percent in 2022.