Americans are using their 401(k) retirement funds due to financial difficulties.

Americans are using their 401(k) retirement funds due to financial difficulties.

The Resilience of the U.S. Economy in the Face of Rising Living Costs

The U.S. economy has defied expectations over the past year, showing remarkable resilience despite increasing living costs and the Federal Reserve’s tightening of monetary policy. However, recent data from Bank of America indicates a potential warning sign for the future.

According to a report published by Bank of America, an alarming number of people have been making withdrawals from their 401(k) plans. The bank’s Participant Pulse report, which monitors the behavior of more than 4 million participants in its recordkeeping clients’ employee benefits programs, reveals a surge in “hardship distributions” in the second quarter of 2023. These distributions refer to 401(k) withdrawals made due to immediate and heavy financial needs.

Compared to the same period a year ago, the number of participants taking hardship distributions increased by 36%. Additionally, the number of people taking these distributions sequentially rose by 12% from the first quarter of this year. In total, almost 16,000 participants sought immediate financial aid between April and June.

The average amount withdrawn in the second quarter was $5,050, an improvement from the previous year’s average of $5,400. Notably, the overall number of people dipping into their 401(k) funds also increased, with 2.5% of participants (or 75,000 account holders) taking loans against their workplace plans. This represents a third more participants than the preceding three months.

Amidst these concerning withdrawal trends, Bank of America reports that the average contribution rate to 401(k) plans has remained steady at 6.5% of income. From April to June, the average 401(k) holder contributed $1,460 to their account, resulting in an average account balance of $82,300—a nearly 10% increase from the end of 2022.

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Interestingly, more participants increased their contribution rate rather than decreased it, and the data reveals that Millennials and Gen Z employees are leading the way in increasing their contributions. Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America, notes that this data tells two stories: one of balance growth and optimism from younger employees, and another of increased plan withdrawals.

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

Bank of America is not alone in noticing these shifts in retirement fund trends. Investment management firm Vanguard released data at the end of last year indicating a rising trend of hardship withdrawals across its funds. Vanguard’s data also showed a 20% decrease in the average retirement account balance between 2021 and 2022. Similarly, Fidelity Investments reported a 30% decline in the number of 401(k) and IRA millionaires in 2022 due to volatile markets impacting retirement savings.

These withdrawal trends raise concerns for an economy heavily reliant on private consumption for approximately two-thirds of its growth. While the resilience of the U.S. economy is commendable, the increasing number of people taking hardship distributions from their 401(k) plans suggests a potential decline in consumer spending. It is essential for employees to understand the importance of balancing short-term expenses with long-term financial security, particularly when it comes to retirement savings.