401(okay) balances fell 20% in 2022, however traders barely flinched

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There’s no question that 2022 was a tough year for investors.

Stocks took a hit amid record high inflation, economic uncertainty and the US Federal Reserve’s aggressive rate hikes to combat rising prices. All three major indices had their worst year since 2008: The S&P 500 Index fell by 19.4% that Dow Jones industry average fell by 8.8% and the Composite Nasdaq Index 33.1% lost.

But most participants in the 401(k) plan weathered the storm — and many have increased their contributions, according to new analysis from Vanguard, which previews its annual How America Saves report.

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At the end of 2022, the average balance of Vanguard participants was $112,572, down 20% from the previous year, the study shows. The median balance — half over and half under — ended the year at $27,376, down 23%.

At the same time, however, 39% of participants saw their deferral rate — the portion of their paycheck that goes into their 401(k) account — increase higher, compared to 9% of investors who reduced their contributions. While many initiated the increase themselves, more than half of the increases came from the plan’s annual automatic escalation.

“Despite economic headwinds, we were pleased to see that pension plan participant behavior remained consistent with prior years and most participants continued to hold a long-term perspective,” said Dave Stinnett, Vanguard’s director of strategic retirement advisory.

Trading among 401(k) investors remained light

Additionally, only 2% of investors in target date funds have made an exchange (59% of participants are in these funds). Of those not invested in futures funds or other professionally managed allocations, only 6% have traded, which Vanguard says is its lowest level in 20 years.

And although hardship benefits have increased, they remain a small proportion of all participants. In the past year, 2.8% have made such a withdrawal, compared to 2.1% in 2021.

“The uptick … may have been driven by individuals’ personal financial health as U.S. households face some tough economic challenges in 2022,” Stinnett said. “Several government moves since 2018 have also relaxed the rules for taking the distributions, so we think that may have been a factor in the increase as well.”

Inflation remains a problem at 6.4% last year

Meanwhile, economic headwinds remain. The latest inflation reading showed a 6.4% rise over the past 12 months – well above the Fed’s target rate of 2%. This suggests more rate hikes are imminent, making borrowing costs more expensive for consumers and businesses.

“The big question about inflation is, can the Fed get it under control without costing people jobs and causing further market declines,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.

Although all three major stock indices have been on an uptrend since early January, it’s impossible to say with certainty if the higher momentum will continue. As of Friday noon, the S&P is up about 6% in 2023, the Dow is up 1.7%, and the Nasdaq is up nearly 13%.

“We’re starting the year on a positive note…which is a nice respite from the carnage of 2022,” Boneparth said.

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