Given the stock market’s dismal performance in the second quarter of 2022—and the first half of the year in general—it’s no surprise that average 401(k) account balances at plans record kept by Fidelity decreased significantly during the second quarter that ended June 30.
The good news is that balances decreased less than the market decline in Q2—and less than the last major period of market volatility, according to Fidelity Investments’ Q2 2022 analysis of savings behaviors and account balances for its more than 35 million 401(k), 403(b) and IRA retirement accounts, released today.
The drop in average balances from April through June—15%—was below the S&P’s decline of 16.1% for Q2 2022 and below Q1 2020, the last period with significant market volatility. In addition, retirement savers continue to look long-term, as total 401(k) savings rates still hovered at record levels, the number of IRAs on Fidelity’s platform continued to increase and the percentage of employees with 401(k) loans remained low for the fifth consecutive quarter.
“Although many Americans are understandably concerned about the economy, record-high inflation and markets at this time, it’s encouraging to see the prevailing emotion has been to stay calm and focused on one’s retirement objectives,” said Kevin Barry, president of Workplace Investing at Fidelity Investments. “Saving for retirement is a goal that is decades in the making, and there will naturally be many twists and turns. However, the best action savers can take to help achieve success is to consistently save and invest.”
The average 401k balance dropped to $103,800 in Q2, down 20% from a year ago when it was $129,300
The average 401(k) balance dropped to $103,800 in the quarter, down 20% from a year ago when it was $129,300 and 15% from Q1 2022, when it was $121,700. The average 403(b) account balance decreased to $93,300, down 18% from a year ago ($113,300) and a decrease of 13% from last quarter ($107,600).
The average IRA balance was $110,800 in Q2, a 17.9% decrease from Q2 2021 ($134,900) and a 12.8% decrease from last quarter, when it was $127,100.
However, all these declines were less than the last period of major market volatility, Q1 2020, taking place at the very start of the pandemic, when the average 401k balance decreased by 19% and IRA balances decreased by 14%.
Interestingly, the analysis found Gen Z 401k savers heavily invested in target date funds experienced smallest declines. Among Gen Z savers, the average account balance dropped by only 8% from last quarter. As of Q2, 85% of Gen Z savers have all of their 401k savings in a target date fund.
The use of target date funds as a default option continues to increase in popularity, with a 93.2% plan sponsor adaptation rate in Q2 2022, up from 88.1% in Q2 2017, just five years ago.
401k Millionaire ranks dwindle
The number of 401k millionaires—those with seven-figure 401k account balances at Fidelity—took a huge hit during the quarter.
After starting the year with a record number of 442,000 401k millionaires, the ranks fell to 406,000 at the end of Q1 and dipped to just 294,000 at the end of Q2 as the stock market continued to drag down those seven-figure balances to a low not seen this decade until now. That’s a drop of 33% since the start of the year. At the end of 2020 there were 334,000 401k millionaires.
The same thing happened over at the federal government’s 401k-like Thrift Savings Plan in the first half of the year. The number of TSP millionaires dropped from 112,880 at the end of 2021 to just 72,241 through the end of June 2022. That’s nearly a 36% decline in the number of TSP participants with seven-figure account balances. At the end of the first quarter of 2022, there were 100,364 TSP millionaires.
When it comes to IRA millionaires, Fidelity now has 284,900—down from 376,100 at the end of 2021 and 346,800 at the end of Q1.
More conservative approach
According to recent Fidelity Investments research, more than half of American workers indicate they are “extremely or very concerned” about the health and stability of the economy—and as a result, nearly 1 in 5 (19%) say they have adjusted their retirement strategy and are taking a more conservative approach to their retirement savings.
The majority of 401k and 403b savers did not make any change to their allocation in Q2—and for those who did, 85% only made one. The top change involved shifting savings to more conservative investments.
Importance of staying the course
Although the current level of uncertainty may raise questions about the wisdom of taking a “stay the course” approach toward retirement savings, Fidelity’s analysis found there are strong reasons to suggest this remains the best approach.
For example, when markets rebound, they tend to do so quickly, especially if the market avoids going into a recession, as many experts continue to suggest. In fact, during the month of July 2022, the S&P increased by 9.1%, enjoying its best month since 2020.
“When it comes to the markets, we often observe that sharp drops are quickly followed by a corresponding rise,” said Barry. “This pattern occurred with the last period of market volatility in 2020, where that first quarter decline was followed by a double digit rebound across retirement account balances—and by the end of 2020, retirement balances had reached record highs. This speaks to the importance of looking long-term and not over-reacting, so you are able to take advantage of any market peaks.”
More analysis highlights
• Significant growth occurred in IRA accounts, especially among Gen Z and Millennials. The total number of Fidelity IRA accounts continues to climb, reaching 12.8 million, a 10.6% increase over Q2 of last year. Younger generations continue to lead the way, with the number of accounts for Gen Z increasing by 87% when compared to Q2 2021 and the number of Millennial accounts increasing by 24%. Account growth for females—who make up 45% of total IRA accounts—saw a year-over-year increase of 92% for Gen Z and 24% for Millennials. These accounts continue to be active, with the number of contributing accounts year to date increasing 4.1% over Q2 2021 and in particular, the number of Millennial Roth IRA accounts with a contribution up 7.8% year to date.
• Total 401k savings rates continue to hover at record levels. Despite the market volatility of the past two quarters, 401k plans continue to see steady contributions from both individuals and their employers. The total savings rate for the second quarter, which reflects a combination of employee and employee 401k contributions, continues the positive momentum achieved in the first quarter, with a 13.9% contribution rate, just below Fidelity’s suggested savings rate of 15%. Men continued to save at higher rates than women (14.7% vs. 13.7%), while pre-retiree Boomers saved at the highest levels (16.6%), although even Gen Z participants saved in the double digits (10%).
• Outstanding 401k loans and average loan amounts continued to decline. The percentage of 401k savers initiating a new loan continues to remain low, with only 2.4% of participants initiating a loan in Q2. In addition, the percentage of participants with a loan outstanding also moved downward, dropping to 16.7% for Q2 2022—which is a significant drop compared to 18.9% in Q2 2020 at the start of the pandemic.
SEE ALSO:
• 401k Savers ‘Stay the Course’ Despite Market Volatility: Fidelity Q1 2022 Retirement Analysis
• TSP Millionaire Ranks Thinned by More Than One-Third
• Thrift Savings Plan Gets Much-Needed July Boost
• Self-Directed 401k Balances Down in Q1: Schwab Report