The number of Americans who tapped their 401(k) savings to cover financial emergencies increased in 2022, according to a recent report.
Nearly 3% of workers made hardship withdrawals from their defined contribution plan in 2022, an increase from the 2.1% in 2021, Vanguard's How America Saves 2023 report said.
Plan loans, which allow participants to borrow from their retirement savings account, also increased by 9% in 2022 compared to 2021 but remained below pre-pandemic levels, the report said.
People with 401(k) plans can access their defined contribution plan assets before retirement by borrowing from their account balance or through a hardship or in-service withdrawal.
"Hardship withdrawals increased moderately, perhaps signaling that some households were facing financial stress," the report said.
However, as automatic enrollment increases, a larger percentage of the workforce, including those with lower incomes, are participating in defined contribution plans, Vanguard noted.
"A modest increase in hardship withdrawals is not entirely surprising," the report said. "And it is important to note that more than 97% of participants did not take a hardship withdrawal during this challenging year.
"This data underscores that participants are generally resilient and maintain a long-term approach to retirement savings, even during uncertain economic times," the report continued.
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Rising prices and interest rates did not dissuade Americans from saving for retirement, the report said.
Retirement plan participants' account balances shrank on average by 20% in 2022 because of macroeconomic challenges like inflation which hit a 40-year high of 9.1% last June. Americans have had to spend more on goods and services, and many are struggling to make ends meet.
Despite the economic challenges the year brought, about 40% of respondents said they increased their deferral rate, in line with previous years, Vanguard said. The deferral rate refers to the amount of an employee's salary contributed toward a defined retirement plan.
Additionally, the number of participants in professionally managed allocations rose to 66%, while the number of participants who maintained a balanced strategy increased slightly to 79% compared to 78% in 2021, according to the report.
An increase in automatic enrollment and the use of professionally managed allocations explain why the contribution rate among participants increased amid economic hardships, Vanguard said.
"Participant outcomes remained strong as plan sponsors continued to implement automatic solutions and leverage human inertia to influence decision-making, even in the face of the challenging economic environment of 2022," Vanguard said.
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The growing use of automatic enrollment has helped improve the financial well-being of Americans. Still, other steps can be taken to further bolster this progress, according to Vanguard.
For instance, automatic enrollment programs should aim to get participants to a 15% total savings rate, Vanguard said. Plan sponsors should also be helping workers achieve other financial goals like paying off student loans and building health care and emergency savings.
"Plan sponsors can help support their employees by offering cost-efficient, high-quality advice as well as a platform that provides guidance on their financial well-being—two valuable services that meet participants where they are on their financial journey and help provide personalized solutions for their goals," Vanguard said.
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