Retirement savers stay the course after rocky 2022 — with a little help from their employer
Americans are saving for retirement at record rates driven in large measure by the growing number of employers automatically enrolling them in workplace 401(k) plans and workers automatically boosting the percentage they contribute each year.
Market volatility aside, 4 in 10 workers increased the percentage of their paycheck they set aside in their 401(k) account last year, compared with 9% of savers who slashed their contributions and 2% who stopped, according to the new “How America Saves 2023” report by Vanguard.
Read more: High-yield savings account vs. investing: Which is right for you?
In 2022, more than 8 in 10 Americans who were eligible for an employer’s voluntary 401(k) retirement plan were enrolled. Since 2013, this measure has increased by eight percentage points. And in spite of inflation, worries about a recession, and rising interest rates, they’re setting aside, on average, 7.4% of their income, a record high, up slightly from 7% in 2018, the report found.
When you combine both employee and employer contributions, the average total savings contribution rate in 2022 was 11.3%. Two-thirds of participants ponied up enough to receive the full employer matching contribution, which averaged 6.8% of pay last year, according to the Vanguard research.
"We certainly can't overlook the significant impact that automatic solutions have had on record-high plan participation," David Stinnett, Vanguard’s head of strategic retirement consulting, told Yahoo Finance.
He added that automatic enrollment and automatic increased contribution rates make it easier for "plan participants to bypass inertia, procrastination, and the perceived complex decision making that often discourages long-term saving."
The analysis was pulled from Vanguard’s roughly 1,700 qualified plans, 1,400 clients, and nearly 5 million retirement plan participants. Here are some more highlights:
Account balances dropped
The news wasn't as cheery in terms of account balances. On average, in 2022, Americans had $112,572 saved up for retirement in a 401(k) plan, down 20% from a year earlier, the data showed. The median balance — half were above, half below — was $27,376 at the end of the year, a 23% decrease.
Of course, there’s an explanation for that hefty drop-off. All three major stock markets had steep declines in 2022. So no surprise, the average total personal investment returns for participants were down around 16% for the one-year period ended December 31, 2022, according to the report. The three-year return, however, was 2.1% and 4.2% for the five-year period ending December 31, 2022.
Impact of auto-enrollment
Almost 60% of all Vanguard’s plans and more than three-quarters of plans with at least 1,000 participants automatically enroll new employees in the savings plan unless they take action to opt out. Plans with auto-enrollment had a 93% participation rate, compared with a participation rate of 70% for plans with voluntary enrollment.
The upshot: Employees who worked for companies that have auto-enrollment plans saved more — an average of 11% of their paycheck — including both employee and employer contributions. Employees who had to make their own decision to enroll in a plan saved an average of 8% of their paycheck when combined with their employer’s match.
Target funds
A large majority (83%) of Vanguard plan participants invested their retirement savings in target-date funds last year. Target-date strategies are a “set-it-and-forget-it” way to invest savings based on the date of retirement, say, 2035 or 2045. At that point, the fund will gradually shift an account’s investments from stocks to more fixed-income and less risky choices, such as cash and bonds, as you age.
Nearly 6 in 10 employees enrolled in one of Vanguard’s 401(k) plans were invested in a single target-date fund in 2022, nearly twice as many as in 2013. The spectacular jump signals “a shift in responsibility for investment decision-making away from the participant and toward employer-selected investment and advice programs,” said researchers.
Plan participation rates differ by age, pay, and tenure
Participation rates were lowest for employees younger than 25 (62%), while a sizable 8 in 10 employees between ages 35 and 64 set funds aside in their 401(k)s. (Workers under age 25, meanwhile, set aside 5.2% of income, while those ages 55 to 64 deferred nearly twice as much, averaging 8.7% of income.)
Time on the job matters. Two-thirds of eligible employees with less than two years on the job participated in their employer’s plan, while nearly 9 in 10 workers with four or more years were saving in their 401(k).
And despite all the noise about women not being engaged with investing, at all income levels, women were more likely than men to join their employer’s plan. For example, a whopping 89% of women earning $50,000 to $74,999 participated in their employer’s plan — compared with 84% of men in the same income group.
Meantime, and not surprisingly, the percentage of income invested in employer retirement accounts is directly related to pay, according to Vanguard.
Last year, workers with incomes of less than $30,000 set aside 4.7%-5.5% of their paychecks, while those earning $75,000 to $99,999 saved 8.2%. Those earning between $100,000 and $149,999 invested 9.2% in their account.
Loans dipped; hardship withdrawals are up
In all, 12% of participants had a loan outstanding in 2022. The good news: That’s down from 13% in 2021 and 15% in 2017. The average loan balance was about $10,500. If permitted by the plan, employees can borrow up to 50% of their 401(k) balance (up to a maximum of $50,000).
Hardship cash outs, however, were on the rise. In 2022, 2.8% of 401(k) plan participants took a hardship withdrawal, a record high, up from 2.1% in 2021 and 1.9% in 2018, according to Vanguard. More than a third (36%) of hardship withdrawals were used to avoid a home foreclosure or eviction, up from 31% of withdrawals in 2021. One in 3 hardship withdrawals were for medical expenses.
“Given the economic headwinds of 2022, the increase in hardship withdrawals may signal that some households faced additional financial stress,” said researchers.
And taking money from your retirement income has an extra sting beyond depleting your accounts. You must pay income tax on any previously untaxed money you receive as a hardship distribution, according to IRS rules. You may also have to pay an additional 10% tax unless you're 59? or older. And you may not be able to contribute to your account for six months after you receive the hardship distribution.
Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist and the author of 14 books, including "In Control at 50+: How to Succeed in The New World of Work" and "Never Too Old To Get Rich." Follow her on Twitter @kerryhannon.
Read the latest financial and business news from Yahoo Finance