Loans and hardship withdrawals inch higher

Retirement savers focused on the long term even as near-term economic pressures remain, Fidelity said.

Retirement savings hovered at record highs in the second quarter, pushing the number of 401(k) millionaires to a record as investors focused on their long-term goals despite persistent anxiety about the broader economy, Fidelity Investments said Thursday.

"People are concerned. They're concerned about the cost of living. They're concerned about inflation. They're concerned about geopolitical situations. But when asked about their personal situation, people are a little more positive," Mike Shamrell, vice president of thought leadership at Fidelity, told MarketWatch.

As a result, retirement investors kept their total average savings rates high - remaining at record levels for the second consecutive quarter - holding at 14.4% for 401(k) savers and 12% for 403(b) savers. That's close to Fidelity's recommended 15% savings benchmark.

The 401(k) savings rate was driven by a record-high employee contribution rate of 9.6%, combined with an average employer savings rate of 4.8%, Fidelity said. As of the second quarter, 12.1% of 401(k) savers increased their contribution rate. More than eight in 10 (81%) of 401(k) participants saved enough to receive their employer's full matching contribution.

In the second quarter, there were 769,000 401(k)-created millionaires, which marked a record high, said Fidelity, which has more than 55 million IRA, 401(k) and 403(b) accounts.

During the second quarter, the S&P 500 SPX jumped 15.2%, marking its strongest quarterly performance since the second quarter of 2020. The gains in this year's second quarter compared to losses of 4.3% in the S&P 500 during the first quarter amid the start of the war in Iran and the closure of the Strait of Hormuz.

Stock-market strength in the second quarter helped boost retirement-account balances higher. The average 401(k) balance was $155,800, up 10.5% since the previous quarter - the strongest quarterly growth since the fourth quarter of 2020, Fidelity said. The median 401(k) balance was $35,800. The average 403(b) balance was $145,000, while the median balance was $36,837. For IRAs, the average balance was $144,523, while the median balance was $10,538, Fidelity said. (Average account balance is calculated by adding all of the account balances together and dividing by the number of accounts; median is the midpoint of the account balances.)

"The combination of record account balances, strong savings behaviors and effective plan design tell an encouraging story about how Americans are approaching retirement," said Sharon Brovelli, president of Workplace Investing at Fidelity Investments. "Workers continue to prioritize their financial future, saving at record levels and taking advantage of valuable benefits such as employer matching contributions. These steps can play a powerful role in strengthening long-term retirement readiness."

Retirement savers remained focused on their long-term goals during the second quarter despite market fluctuations earlier this year and concerns about the economy, Fidelity said. Only 5.5% of retirement savers made a change to the asset allocation during the second quarter.

"You'll see a lot of different scenarios in the course of your savings. It's best not to make changes on short-term events," Shamrell said. "Retirement savings is a marathon, not a sprint."

Retirement-account loans outstanding inched up slightly during the second quarter to 19.5%, up from 19.2% a year ago, Fidelity said. That means that roughly one out of every five people on Fidelity's retirement platform has a loan outstanding, Shamrell said.

"When a financial situation arose, they thought their 401(k) was the place to turn to," Shamrell said.

Some of that can be attributed to people having insufficient emergency savings or other pools of funds to turn to during a financial crunch, Shamrell said. Financial experts typically say Americans should have enough to cover three to six months' worth of basic living expenses set aside in a high-yield savings account in case of unexpected expenses or a job loss. Employees without emergency savings are twice as likely to turn to their retirement funds for loans or withdrawals, Fidelity has said previously.

In the second quarter, hardship withdrawals totaled 3%, which is an increase from 2.6% a year ago, Fidelity said. With hardship withdrawals, an employee has to prove an "immediate and heavy financial need" under Internal Revenue Service rules. Examples include funds to avoid eviction or foreclosure, receive medical care, and pay for funeral expenses or tuition. Hardship withdrawals are taxed as ordinary income, and the employee pays a 10% penalty if they're younger than age 591/2. The funds also don't get repaid to the retirement account.

Overall, Shamrell said the second quarter marked stronger savings trends as Americans gradually learn more about retirement through different media outlets, personal-finance influencers, podcasts and myriad other information sources.

"People are starting to build their understanding. There's gradual growth in the understanding of retirement overall - Q2 was great, but keep an eye on the long-term goal with good habits," Shamrell said.

-Jessica Hall