There’s a jump in Americans pulling money out of 401(K) plans

The number of Americans withdrawing funds from their 401(k) accounts increased 36% in the second quarter of 2023, when compared to 2Q 2022, a report from Bank of America has found.

The news was not all bad, as the report found that overall balances increased nearly 12%. However, the study also found that 2.5% of 401(k) members borrowed from their workplace plan in 2Q 2023, up from 1.9% in the first quarter of the year. This was also higher compared year to year, as that number was 2.3% in 2Q 2022.

In addition, the number of participants taking hardship distributions in 2Q was nearly 6,000 plan participants, up 12% compared to 1Q and up 36% from 2Q22.

“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,” said Lorna Sabbia, Head of Retirement and Personal Wealth Solutions at Bank of America. “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.”

Report finds contributions remain steady The data in the report draws from employee benefits programs of Bank of America clients, representing more than 4 million participants. The report found that even with rising withdrawals, employee contributions remained steady, with the average rate remaining at 6.5% throughout the first half of this year. Meanwhile, more participants increased than decreased their rate of contribution (10.2% vs. 2.2%) in Q2. These contribution increases were led by Gen Z and millennial employees (19.3% vs. 2.6% and 11% vs. 2.6%, respectively), the report said.

Other findings:

• HSA account balances increased by 11.9% over year-end 2022. Average HSA account balances increased from $3,931 to $4,397 in the first six months of 2023.
• Many HSA account holders continue to save their contributions for future expenses. Nearly 4 in 10 account holders contributed more than they withdrew in Q2, consistent with year-end 2022.
• Baby boomers invested their HSAs at higher rates than other generations. On average, only 12% of account holders invested their HSAs for future growth in Q2, with baby boomers leading at 15%. In addition, more men invested than women (18% vs. 11%).
• Feelings of financial wellness declined slightly. Out of a possible 100 points, the average financial wellness score for employees was 56, down one point from 57 at year-end, with women trailing men (52 vs. 59).

A mixed-signal economy

The report came as the U.S. economy continued its good-news, bad-news trend of the past year or so. On the same day as the Bank of America report, the Federal Reserve Bank of New York found that credit card debt levels in the U.S. have gone over $1 trillion for the first time. The Fed’s report showed that credit card debt went up $45 billion in 2Q, or 4.6%. Overall household debt levels topped $17 trillion.

Related: The true cost of ‘forgotten’ 401(k) accounts: $1.65 trillion

These higher levels of debt, matched with continuing high levels of inflation, may be signal that Americans are still struggling in an economy that otherwise seems to be improving. In general, economic news had recently shown a lower rate of inflation and continued job growth. Just four days before its report on debt, the Bank of America had announced the U.S. would not see a recession in the near future, a significantly more optimistic view than some economists expressed just a few months ago.

U.S. Federal Reserve Chair Jerome Powell announced at the end of July that the Fed no longer expected a recession. Hiring has remained healthy in the U.S., suggesting the economy remains resilient. However, Powell said that inflation rates are still too high. “The process of getting inflation down to 2% has a long way to go,” he said at a July 26 news conference.