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Self-directed retirement plan balances increased in Q4: report

By Javier Simon
Published  March 28, 2023 7:02pm EDT
Personal Finance
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The average accountant balances for 401(k)s increased in Q4 2022 from Q3. (iStock)

The average account balance for self-directed 401(k)s grew to $280,099 for the fourth quarter of 2022, up by 2.45% from the previous quarter, according to a report by Charles Schwab. 

Self-directed 401(k)s are retirement plans that exist within a company’s 401(k) plan, but allow participants to invest in their choice of stocks, bonds, mutual funds and other securities that aren’t part of the traditional 401(k) investment menu.

Here’s how these plans broke down by holdings in Q4, according to Schwab: 

  • Equities: 31.3%.
  • Mutual funds: 29.4%
  • ETFs: 22.1%

Baby boomers held the largest balances in self-directed 401(k)s with an average of $453,554, Schwab reported. That was followed by Gen X (with $252,171) and millennials (with $85,446).

However, overall self-directed 401(k) balances were down by 20.6% year-over-year.

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RETIREMENT PLAN BALANCES DECREASED BY NEARLY 25% IN 2022

Other retirement plans saw balances rise in Q4

As self-directed 401(k) balances went up in the fourth quarter of 2022, so did the average investments in 401(k)s, 403(b)s and IRAs, according to a report by Fidelity Investments. 

The average IRA balance ended Q4 2022 at $104,000, an increase of 2% from the previous quarter. Meanwhile, the average 401(k) balance increased 7% to $103,900 and the average 403(b) balance increased 6% to $92,683, up from the previous quarter, according to Fidelity.

However, balances for each type of plan dipped year-over-year. And 74% of workers around the globe said inflation and the rising cost of living were the biggest stressors in their lives, Fidelity reported.

"Given all the stresses in the world today, such as natural disasters and geo-political events, Americans continue to confront challenging times in our economy," Kevin Barry, president of Workplace Investing at Fidelity Investments, said in a statement. "Fortunately, the data shows that retirement savers understand the importance of saving for the long-term, despite market shift. We are encouraged to see people look past the current volatility and continue to make smart choices for their future."

In fact, more than one-third of savers increased their contribution rate year-over-year at an average rate of 2.6%, Fidelity said. In addition, 401(k) loans dropped to their lowest percentage on record. 

While 401(k) loans may seem appealing in times of financial demands, they may come with certain consequences, according to the IRS. If participants don’t repay the loans based on the specified terms, the loan becomes a distribution from an account. This means participants may owe income tax on the distribution and a 10% early-withdrawal penalty if they have not reached age 59.5, the IRS said.

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RECESSION FEARS RISE: MORE THAN HALF OF AMERICANS SAY THEY'D LOSE EVERYTHING

Secure 2.0 aims to improve retirement savings for Americans

Even though retirement plans saw a decrease in balances on an annual basis in 2022, the federal government has passed legislation designed to overhaul the retirement plan industry and make it easier for Americans to save for retirement. 

Congress passed the Secure 2.0 Act at the end of 2022, which makes several changes to retirement plan benefits. Here are some of its highlights:

These provisions are set to take place in the coming years. 

"Because this law passed at the tail end of the legislative session, many of the affected agencies and institutions haven't yet fully digested all the new provisions," Schwab said in a post. "Some of the law's wording still needs to be interpreted, and in some cases, financial institutions and plan managers may have even printed—and sent—year-end documentation reflecting the rules that existed before the law was passed. 

"So, be careful when reviewing any material about the rules governing topics such as RMDs and retirement savings," Schwab continued. "It may take some time for all the changes in SECURE 2.0 to be fully worked out."

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INFLATION COOLS BUT INTEREST RATE AND RECESSION FEARS REMAIN

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