Employees continue to be challenged by tough economic circumstances, but new analysis from Bank of America reveals that for most savers, ransacking their retirement funds is not in the cards.
The bank is now releasing quarterly analyses breaking down short-term retirement trends — their first 401(k) participant pulse looked at rates of 401(k) loans, hardship distributions and changes to overall contributions to gauge financial confidence.
Overall, their data showed that participants are less likely to rely on their 401(k) funds to cover day-to-day expenses. In the fourth quarter of 2022, just 2.1% of plan participants took out a 401(k) loan, down from 2.3% in the previous quarter. Hardship distributions were also down, and used by a very slim minority — just 0.4% of savers turned to this method, down from 0.5% the previous quarter.
“We wanted a complete picture of what is going on with a participant as they think about the economy,” says Kevin Crain, head of retirement research and insights at Bank of America. “If I put all the layers together, my conclusion would be that there’s more of a moderate impact to the economy on people.”
Bank of America’s data looked at both participant activity and the number of transactions, and found that while the number of hardship withdrawals they processed in 2022 was up 36% from 2021, the number of people taking them was just 13,000 higher than the previous year, and those individuals were requesting smaller amounts.
“You could say, whoa, that’s a big jump,” Crain says. “But the difference from 2021 to 2022 is only 13,000 more participants among millions. I’m not dismissing that for those 13,000 additional people, but at the end of the day, just 1.6% of all participants are taking that hardship. Yes, there’s an impact, but it’s not to the severe extent you might think.”
Inflation has shaken consumer confidence: nearly half of Americans are living paycheck-to-paycheck, U.S. Bureau of Labor Statistics data found, and 83% say inflation is causing them financial stress, according to data from the American Psychological Association. Yet employees continue to see tapping into their retirement nest egg as a last resort, a credit to employers’ investment in financial wellness benefits and education, Crain says.
“People are at least thinking hard on what they need to do and how they need to do it, without their first jump being using a 401(k) as a piggy bank,” he says. “Education is helping to make people at least think through the consequences, and use other sources of money first. The encouragement for employers towards employees on emergency savings vehicles will only improve the situation.”
Additionally, recent SECURE 2.0 legislation is adding further protections and programs around auto enrollment, auto escalation and emergency savings plans. Bank of America has these benefits in place and has seen positive impacts.
“Make it as easy as possible to start to save in the plan and then help them bump along in the plan,” Crain says. “Auto enrollment and auto escalation are great examples, and in our plans, there’s only a 2% opt out rate on auto enrollment, so people will stay with it and also let their contributions increase.”
Bank of America’s analysis found that while inflation is playing a lesser role in retirement confidence than perhaps expected, employers and plan sponsors need to acknowledge that financial hardships are still plaguing workers and proactively work to educate them on their options. Consistent retirement education, emergency savings benefits, and professional management services can help employees not only feel confident, but act confidently in their financial choices.
“People need actionable education and planning help in the 401(k) plan — they need investment help, because it’s hard for people to be their own asset manager and be educated enough to know what to do,” Crain says. “Managing accounts with things that people can easily invest in and know they’re diversified and know they’re professionally managed, is a big help to getting people to stay in the plan both long-term, and in post-retirement to get income from that plan.”