Average 401(k) account balance fell in the third quarter — but it’s still up double digits from a year ago

Given that the S&P 500 fell 3.7% in the third quarter of this year, it’s not surprising that 401(k) account balances followed suit.

The average 401(k) balance was down 4% from the second quarter, but is still up 11% from a year ago and up 27% over the past decade, according to a new analysis from Fidelity Investments, one of the largest US providers of workplace retirement plans.

What’s more, savings rates remained strong. Including both their own and their employers’ contributions, 401(k) participants were saving an average of 13.9% of their income, up slightly from a year ago, Fidelity said. Baby Boomers who are still in the workforce were socking away the most, at an average of 16.7%.

But the increase in withdrawals and loans suggest some financial stress

Nevertheless, more people took money out of their 401(k) plan last quarter, indicating financial strain.

Fidelity found that 2.3% of workers took hardship withdrawals, up from 1.8% a year ago. The top reasons cited: Avoiding foreclosure or eviction; and medical costs.

Withdrawals from one’s 401(k) are subject to income tax. And if they are made before age 59-1/2 they also may be subject to a 10% early withdrawal penalty unless the money is intended to meet an immediate financial need that is considered a “hardship,” such as medical expenses or efforts to avoid losing one’s home.

By contrast, so-called in-service withdrawals — which are for expenses not deemed hardships and for which a person is willing to pay the tax and penalty — also rose in the third quarter to 3.2%, up from 2.7% from a year ago. They are subject to the 10% early withdrawal penalty if taken before age 59-1/2.

Meanwhile, the percentage of participants taking loans from their 401(k)s also ticked up in the third quarter, increasing to 2.8% from 2.4% in the same quarter last year. Inflation and cost-of-living pressures may account for that increase in loans, according to Fidelity. Altogether, the percent of outstanding 401(k) loans stood at 17.6% versus 17.2% in the second quarter. The all-time low in outstanding loans — 16.6% — was reached in early 2022.

Loans — which in most instances can’t exceed 50% of one’s vested balance or $50,000, whichever is less — typically must be paid back with interest within five years and payments must be made on at least a quarterly basis.

Overall, Fidelity said, “The increasing use of hardship withdrawals and loans underscore the need to help retirement savers develop emergency savings, which Fidelity has found to be the No. 1 savings goal among employees, after retirement.”

It noted that many leading employers are now working with Fidelity to add workplace emergency savings programs as a benefit.