The last year has been difficult for retirement savings. With the United States already experiencing a retirement crisis, the decline in the stock and bond markets impacted practically every prominent 401(k) fund this year, causing balances in workplace retirement savings plans to decrease. Adding insult to injury, rapid inflation further eroded reserves.
However, there is a silver lining for those not nearing retirement: The prognosis for equities and bonds has improved. Nathan Zahm, head of goals-based investing for Vanguard’s Investment Strategy Group, stated that this year was difficult in terms of returns, but that has greatly improved the predicted returns coming forward. You have a brighter view than you had a year ago when equities prices were overvalued, and bond returns were 1.5%.
2022 Ugly Returns
Popular retirement funds declined as skyrocketing growth stocks took a beating. Certainly, Vanguard’s baseline projection for 2023 is a recession. However, the company’s longer-term view for US and foreign bonds is between 4% and 5% annually over the next decade and between 7% and 9% annually for non-US equities. (Vanguard anticipates a 5% to 7% increase in US equities for the time mentioned above period.)
“Anyone with a long-term perspective has many reasons to be optimistic,” stated Zahm.
In 2023, individuals can also contribute more to tax-advantaged retirement plans. The maximum contribution to workplace savings plans such as 401(k)s is now $22,500, an increase of $2,000 from 2022, and the maximum “catch-up” contribution for savers over 50 is now $7,500.
The simplest method to recover from the devastation of 2022, when prices on some of the most popular actively managed funds in 401(k) plans plummeted, is to save more.
As of December 19, the T. Rowe Price Blue Chip Growth Fund (TRCBX) and Harbor Capital Appreciation Fund (HNACX) lost more than 37% of their value. In contrast, the Vanguard 500 Index Fund (VFIAX) was down roughly 20%.
Even broadly diversified funds, such as target-date funds (TDFs), in which many 401(k) participants are automatically enrolled, were negatively affected. These funds allocate money across asset classes and become automatically more conservative as investors approach their predicted retirement age.
On December 19, Vanguard’s roster of TDFs saw price declines ranging from 13.8% for its 2020 fund (VTWNX) to 18% for its 2050 fund (VTWNX) (VFIFX). Losses for Fidelity Freedom funds ranged from 20.1% for its 2025 fund (FFTWX) to 24.4% for its 2040 fund (FFTWX) (FFFFX).
Increased Hardship Withdrawals
Hardship withdrawals from 401(k) funds were a concerning development in 2022. Data from retirement plan titans Empower Retirement, Fidelity Investments, and Vanguard indicate an increase in hardship withdrawal loans, albeit from a low starting point.
In contrast to loans taken out against a 401(k) account balance, these withdrawals cannot be reimbursed into the account. They are considered taxable income by the IRS, and anybody under age 59 1/2 may be subject to a 10% early withdrawal penalty.
In the 12 months preceding September 30, the number of 401(k) investors making emergency withdrawals increased by 24%, reaching over 30,000.
Additionally, many investors are moving their 401(k) funds into more conservative options. Rob Austin, chief of research at the benefits administrator Alight Solutions, noted that stable value funds had become a major trend. In the preceding year, approximately 80% of all net trading dollars monitored by Alight’s 401(k) Index were allocated to stable value funds.
The asset classes with the highest frequency of withdrawals from Alight’s Index were target-date funds (53%), large-cap US equities (17%), and employee holdings of company shares (12%). The index monitors plans with over 2 million participants who utilize Alight as their record-keeper.
Historically, stable-value funds have generated bond-like returns that exceed those of money market funds. In actuality, the things that appear simple might be rather complicated. A contract between a retirement plan and one or more banks or insurance organizations provides stability. This protection ultimately depends on the financial stability of the banks or insurers, and there are limits on making withdrawals from accounts.
Some anticipated changes in 2023 may be advantageous for savers, such as the improved portability of 401(k)s across companies. Fidelity Investments, Vanguard, and Alight have stated that they would begin automating the transfer of 401(k) accounts with balances below $5,000 in 2022.
The Employee Benefit Research Institute believes that if such portability is widely implemented, it could save an additional $1.5 trillion in retirement plans over 40 years, with Black and minority workers saving an additional $619 billion and women saving an additional $365 billion.