There’s a ton of cash in the U.S. 401k retirement plan market, with approximately $9 trillion flowing through the financial markets on behalf of over 100 million Americans, according to the US Department of Labor.
There’s a problem in the 401k market in 2023, however, and it’s a big one. Combined assets in employer-sponsored retirement savings plans are thinning out at an alarming rate.
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Overall, the average balance in 401k and 403b plan accounts has fallen from $141,542 in 2021 to $112,572, according to investment funds giant Vanguard. That’s about a 20% loss over a two-year period for a huge investment demographic that’s already falling behind on their long-term savings goals.
Median 401k account balances aren’t performing much better, the company noted in its most recent “How America Saves” report.
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Median Balances Sliding
According to Vanguard, median balances – which represent the middle point in average accumulated employer retirement plan assets - slid from $35,345 in 2021 to $27,376 for the company's retirement account clients.
There are multiple reasons why 401k assets are in free-fall mode, with underwhelming market performance predominant.
“Vanguard participants’ average account balances decreased by 20% since year-end 2021, driven primarily by the decrease in equity and bond markets over the year,” Vanguard stated in its report.
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Other retirement fund accumulation challenges include inflation, which rose to its highest rate in 40 years in 2022, “and remains a concern for policymakers and American households”, Vanguard stated.
Rising Interest Rates Contribute to Decline
Rising interest rates, especially in the mortgage sector where rates are at a 20-year high, also figure into the 401k declining assets picture.
It’s also no coincidence that the retirement account asset slide occurred as the covid-19 pandemic and resulting government lockdowns caused global economies to hit the brakes.
“While certain aspects of the covid-19 pandemic appear to be behind us, it’s created several ongoing challenges” for retirement investors, Vanguard noted.
What’s the way out for beleaguered retirement plan investors? A stabilized US economy would help, as would a rising US stock market, which is rebounding in 2023 – the S&P 500 is up 14.85% so far in 2023.
Americans can also help themselves out by stashing as much cash as they can afford into their retirement accounts.
“We believe participants should be saving at least 12%-to-15% of their pay to meet their retirement goals,” said John James, managing director at Vanguard’s Institutional Investment Group. “We’re not there yet – but we’re close. 20% of participants need a boost of just 1% to 3% to hit their target savings rate.”
