Rising Withdrawals
A worrying trend in 2022 was a pickup in hardship withdrawals from 401(k) accounts late in the year. Data from retirement plan giants Empower Retirement, Fidelity Investments and Vanguard all show a rise in hardship withdrawal loans, albeit off a low base.
These withdrawals, unlike loans taken out against a 401(k) account balance, cannot be repaid into one’s account. The IRS counts them as taxable income, and someone under 59½ may pay a 10% early withdrawal penalty.
Many savers are also transferring their 401(k) money into more conservative investments. A big trend has been a shift into stable value funds, said Rob Austin, head of research for benefits administrator Alight Solutions. In the past year, nearly 80% of all net trading dollars tracked by Alight’s 401(k) Index went into stable value funds.
The most common asset classes that saw outflows in Alight’s Index were target-date funds (53%), large-cap U.S. equities (17%) and employee holdings of their company’s stock (12%). The index tracks plans with more than two million participants that use Alight as their record-keeper.
Stable value funds have historically provided smooth, bond-like returns that top those of money market funds. The simple-sounding products can actually be pretty complex. The stability comes from a contract that a retirement plan has with one or more banks or insurance companies. That safeguard is ultimately tied to the financial strength of the banks or insurers, and there are restrictions on withdrawing money from accounts quickly.
Portable 401(k)s
Savers may benefit from some logistical changes expected to roll out in 2023, such as the increased portability of 401(k)s between employers. Fidelity Investments, Vanguard and Alight announced a rare collaborative effort in 2022 to start automating the transfer of 401(k) accounts with balances below $5,000.
If such portability is widely adopted, the Employee Benefit Research Institute estimates that it could keep an additional $1.5 trillion in retirement plans over 40 years, with Black and minority workers saving an additional $619 billion and women saving $365 billion more.
This article was provided by Bloomberg News.