The Market Tanked, but Americans Kept Piling Money Into Their 401(k)s

Last year was tumultuous for stocks with the S&P 500 falling the most for the year since 2008. But Vanguard’s data indicates that retirement savers largely stayed the course, resisting the temptation to sell assets and risk their long-term financial security.

Assisted by the spread of programs that put retirement saving and investing on autopilot, workers with 401(k) accounts “are continuing to invest, continuing to save and resisting the impulse to make trades based on emotion,” said Dave Stinnett, head of strategic retirement consulting at Vanguard.

U.S. consumers have begun showing some signs of financial stress. In recent months, credit-card balances rose to prepandemic levels and the personal savings rate has declined.

However, the unemployment rate fell to 3.5% in December from 3.6% in November, and average hourly earnings for private-sector employers were up 4.6% in December from a year earlier. Employers aren’t showing signs of cutting the contributions they make to employees’ 401(k) accounts, Mr. Stinnett said.

Last year, 9% of workers with 401(k) accounts at Vanguard scaled back their savings rate from 2021, a slight increase from the 7% who did so the year before, according to data Vanguard plans to publish in June in an annual report that tracks the nearly five million people in its retirement plans.

At the end of 2022, people in Vanguard-administered 401(k) plans held 74% of their assets in stocks, up from 72% in 2020.

About 6% of participants who manage their own 401(k) investments transferred money from one fund to another last year, down from 8% in 2021 and 10% in 2020, according to Vanguard.

Among workers exclusively using a diversified target-date fund, which shifts money from stocks to bonds as investors age, only 2% traded last year, Vanguard said.

Investors’ willingness to stick with their mix of assets and savings rates, even in a year of market declines, is due in part to many plans adopting automatic features designed to remove impediments to saving and investing, Mr. Stinnett said.

Among the 1,700 plans that use Vanguard’s administrative services, 58% automatically enrolled new hires, mainly into target-date funds, in 2022, up from 32% in 2012. A majority of those plans also automatically increase employees’ savings rates, typically by 1 percentage point a year until reaching a cap that is often 10% or more, according to Vanguard. 

Richard Thaler,

a Nobel Prize-winning behavioral economist known for his work on automatic 401(k) plan features, compared these advances to GPS for driving. They help investors take the right approach and stay the course, without having to overthink it. 

“Now that we all have GPS on our phone and in our cars we get lost less often, but it is not that we have gotten smarter or acquired a better sense of direction,” Dr. Thaler said.

The market’s strong performance in recent years may also have given investors confidence to stick with stocks, Mr. Stinnett said.

Despite falling 19.4% in 2022, the S&P 500 index earned an annualized return of 11.3% from 2019 through 2022, thanks to a 29% rise in 2019 and a 27% gain in 2021. That is significantly above the index’s 5.8% annualized return since Jan. 3, 1928, according to Dow Jones Market Data.

Not all signs point to improving retirement safety nets. The average balance declined by 20% last year to $112,572. And early withdrawals from 401(k) accounts rose in 2022, as more Americans faced financial emergencies and higher prices.

Hardship distributions, which the Internal Revenue Service allows for reasons including preventing evictions and paying medical bills, hit a record high, with 2.8% of participants in plans Vanguard administers taking them. Loan initiations increased by 9%.

Contributing to the increase are changes in federal law since 2018 that have loosened the rules governing when people can tap their retirement accounts for hardship-related reasons.

Write to Anne Tergesen at [email protected]

Last year was tumultuous for stocks with the S&P 500 falling the most for the year since 2008. But Vanguard’s data indicates that retirement savers largely stayed the course, resisting the temptation to sell assets and risk their long-term financial security.

Assisted by the spread of programs that put retirement saving and investing on autopilot, workers with 401(k) accounts “are continuing to invest, continuing to save and resisting the impulse to make trades based on emotion,” said Dave Stinnett, head of strategic retirement consulting at Vanguard.

U.S. consumers have begun showing some signs of financial stress. In recent months, credit-card balances rose to prepandemic levels and the personal savings rate has declined.

However, the unemployment rate fell to 3.5% in December from 3.6% in November, and average hourly earnings for private-sector employers were up 4.6% in December from a year earlier. Employers aren’t showing signs of cutting the contributions they make to employees’ 401(k) accounts, Mr. Stinnett said.

Last year, 9% of workers with 401(k) accounts at Vanguard scaled back their savings rate from 2021, a slight increase from the 7% who did so the year before, according to data Vanguard plans to publish in June in an annual report that tracks the nearly five million people in its retirement plans.

At the end of 2022, people in Vanguard-administered 401(k) plans held 74% of their assets in stocks, up from 72% in 2020.

About 6% of participants who manage their own 401(k) investments transferred money from one fund to another last year, down from 8% in 2021 and 10% in 2020, according to Vanguard.

Among workers exclusively using a diversified target-date fund, which shifts money from stocks to bonds as investors age, only 2% traded last year, Vanguard said.

Investors’ willingness to stick with their mix of assets and savings rates, even in a year of market declines, is due in part to many plans adopting automatic features designed to remove impediments to saving and investing, Mr. Stinnett said.

Among the 1,700 plans that use Vanguard’s administrative services, 58% automatically enrolled new hires, mainly into target-date funds, in 2022, up from 32% in 2012. A majority of those plans also automatically increase employees’ savings rates, typically by 1 percentage point a year until reaching a cap that is often 10% or more, according to Vanguard. 

Richard Thaler,

a Nobel Prize-winning behavioral economist known for his work on automatic 401(k) plan features, compared these advances to GPS for driving. They help investors take the right approach and stay the course, without having to overthink it. 

“Now that we all have GPS on our phone and in our cars we get lost less often, but it is not that we have gotten smarter or acquired a better sense of direction,” Dr. Thaler said.

The market’s strong performance in recent years may also have given investors confidence to stick with stocks, Mr. Stinnett said.

Despite falling 19.4% in 2022, the S&P 500 index earned an annualized return of 11.3% from 2019 through 2022, thanks to a 29% rise in 2019 and a 27% gain in 2021. That is significantly above the index’s 5.8% annualized return since Jan. 3, 1928, according to Dow Jones Market Data.

Not all signs point to improving retirement safety nets. The average balance declined by 20% last year to $112,572. And early withdrawals from 401(k) accounts rose in 2022, as more Americans faced financial emergencies and higher prices.

Hardship distributions, which the Internal Revenue Service allows for reasons including preventing evictions and paying medical bills, hit a record high, with 2.8% of participants in plans Vanguard administers taking them. Loan initiations increased by 9%.

Contributing to the increase are changes in federal law since 2018 that have loosened the rules governing when people can tap their retirement accounts for hardship-related reasons.

Write to Anne Tergesen at [email protected]