Participants backed off from dipping into their 401(k) accounts to cover expenses in the fourth quarter of 2022, a sign of confidence that inflation might be cooling, according to a Bank of America pulse report released today.
The report, which looked at the activity of three million 401(k) participants, found that 60,789 of them borrowed from their workplace plan in the fourth quarter, a decline of 12% from the previous quarter. The average loan amount was $7,500, the lowest average for all four quarters in 2022, the report said.
It also found that fewer participants felt the urge to take hardship withdrawals for immediate financial needs. Hardship distributions in the fourth quarter of 2022 averaged 0.4%, down from 0.5% in the third quarter, and the number of participants taking such withdrawals dropped 18% to 12,350. The average hardship amount was $4,700 on average, a decline of 8% from the third quarter.
A hardship withdrawal is generally needed for something immediate like an eviction, while a loan in most cases is for longer term needs such as purchasing a home, explained Kevin Crain, head of retirement research and insights and one of the researchers on the report.
The loan and hardship withdrawals, Crain said, “suggest that the economic impact has subsided in terms of how participants are taking action in their plans.” Earlier in the year, he said, there were increases in hardship withdrawals year over year, “but in the fourth quarter [the researchers] started to see the declines in the number of participants and also the dollar amounts.”
The report used data from BofA’s proprietary financial benefits programs, which includes the three million-plus 401(k) plan participants.
Bank of America also found that the average plan participant contribution rate dipped from 6.6% at the end of 2021 to 6.4% at the end of 2022, “suggesting consumers may have been a bit more focused on short-term financial needs last year,” the report said.
But Crain also noted that contributions by dollars in 2022 rose by 1%. Since wages were growing, he said it might have been that people were keeping their dollar amount contributions the same even as their contribution rates were slightly lower. That would give them a bit more money per paycheck to do something else.
The 401(k) borrowing, the report said, was driven mostly by participants aged 30 to 49. BofA also noted that loan defaults rose slightly to 15.9%, but it was Gen X (those aged 43 to 58) who were most in default (3.1% of them) at the end of the year.
Baby boomers, the report found, had the highest percentage of participants (43%) contributing 3% or less. But millennials, who are stereotyped as job hoppers and non-savers, led in savings rates, with nearly half (47%) contributing 7% or more to their plan.
Crain said it’s promising to see millennials on top in the savings rates category. “I am heartened by that,” he said, explaining that the auto-enroll and auto-increase provisions now included in many 401(k) plans make it easier for those in the younger generation to save when they start a job.
“The younger generations like those features,” he said, “and you’re seeing that reflected in [them] being more aggressive savers because it’s easier for them.” He also pointed out that the recent SECURE Act 2.0 further beefed up auto-enrollment requirements to help people save early and increase their savings.