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401(k)s Tanked in 2022. Here’s What to Do in 2023.

There are some signs of relief that may set up savers for higher future returns, particularly in the bond market.


(Bloomberg) -- It’s been a rough year for retirement savers.

With the US already facing a retirement crisis, people watched the balances in their workplace retirement savings plans shrink this year as the slump in stock and bond markets hit nearly every popular 401(k) fund. Adding insult to injury, high inflation also took a bite out of savings.

But there’s some positive spin after the very bad year, at least for people who aren’t close to retirement: The outlook for stocks and bonds has started to improve.

“This year was hard in terms of returns, but that has really increased the expected returns going forward,” said Nathan Zahm, head of goals-based investing in Vanguard’s Investment Strategy Group. “You have a better outlook now than you did 12 months ago, when equity valuations looked very stretched and bond returns were 1.5%.” 

To be sure, Vanguard’s baseline expectation is for a recession in 2023. But the company’s longer-term outlook is annualized returns for US and international bonds of about 4% to 5% over the next decade, and for roughly 7% to 9% per year from non-US stocks. (Vanguard’s forecast for US stocks is 5% to 7% over that period.)

“Anyone with a longer-term mindset has a lot to be excited about,” Zahm said. 

People can also put more money into tax-advantaged retirement plans in 2023. The amount that can be contributed to workplace savings plans such as 401(k)s is now $22,500, a $2,000 gain from 2022, and the amount of allowed “catch-up” contributions for savers age 50 and older now stands at $7,500, up from $6,500.

Deep Drops

Simply saving more is the most basic way to try and recover from 2022’s carnage, when prices on some of the most popular actively managed funds in 401(k) plans dove deep into the red.

The T. Rowe Price Blue Chip Growth Fund (TRCBX) had plummeted nearly 42% in price, and Harbor Capital Appreciation Fund (HNACX) had fallen more than 37%, through Dec. 19. The Vanguard 500 Index Fund (VFIAX), meanwhile, was down nearly 20%.

Even more broadly diversified funds, such as target-date funds (TDFs), which many 401(k) savers are automatically enrolled in, suffered. These funds divvy up money between asset classes and automatically become more conservative as savers near an assumed retirement age. 

At Vanguard, by Dec. 19 its roster of TDFs showed price drops ranging from 13.8% for its 2020 fund (VTWNX) to 18% for its 2050 fund (VFIFX). Fidelity Freedom funds saw losses ranging from 20.1% for its 2025 fund (FFTWX) to 24.4% for the 2040 fund (FFFFX).

Rising Withdrawals

A worrying trend in 2022 was a pickup in hardship withdrawals from 401(k) accounts late in the year. Data from retirement plan giants Empower Retirement, Fidelity Investments and Vanguard all show a rise in hardship withdrawal loans, albeit off a low base. 

These withdrawals, unlike loans taken out against a 401(k) account balance, cannot be repaid into one’s account. The IRS counts them as taxable income, and someone under 59 ½ may pay a 10% early withdrawal penalty. 

Many savers are also transferring their 401(k) money into more conservative investments. A big trend has been a shift into stable value funds, said Rob Austin, head of research for benefits administrator Alight Solutions. In the past year, nearly 80% of all net trading dollars tracked by Alight’s 401(k) Index went into stable value funds.

The most common asset classes that saw outflows in Alight’s Index were target-date funds (53%), large-cap US equities (17%) and employee holdings of their company’s stock (12%). The index tracks plans with more than 2 million participants that use Alight as their record-keeper. 

Stable value funds have historically provided smooth, bond-like returns that top those of money market funds. The simple-sounding products can actually be pretty complex. The stability comes from a contract that a retirement plan has with one or more banks or insurance companies. That safeguard is ultimately tied to the financial strength of the banks or insurers, and there are restrictions on withdrawing money from accounts quickly.

Portable 401(k)s

Savers may benefit from some logistical changes expected to roll out in 2023, such as the increased portability of 401(k)s between employers. Fidelity Investments, Vanguard and Alight announced a rare collaborative effort in 2022 to start automating the transfer of 401(k) accounts with balances below $5,000.

If such portability is widely adopted, the Employee Benefit Research Institute estimates that it could keep an additional $1.5 trillion in retirement plans over 40 years, with Black and minority workers saving an additional $619 billion and women saving $365 billion more. 

To contact the author of this story:
Suzanne Woolley in New York at [email protected]

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