By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Fidelity has recently reported that the average 401(k) balance declined by -23% in 2022. Vanguard reported that their “average” 401(k) account declined by -20%. In case you thought IRAs may have performed better – think again! The average IRA also declined by-20%! These are shocking results, especially given the fact that the S&P 500 declined by -18%, while the Bloomberg Barclays Aggregate index fell -13%. What were these plan participants investing in that they suffered considerably greater losses?

The average American Worker is saddled with incredible expenses that are being negatively impacted by the current inflationary environment. The ability to continue to contribute to a “retirement” fund is becoming more challenging. According to the Fidelity and Vanguard releases, nearly 17% of participants have taken loans and the average contribution (employee and employer) remains at about 13.5%, which is below an appropriate target of 15%. For those that have recently retired the loss of >20% of one’s corpus is devastating. For those that were close to retirement, those plans have likely been delayed.

Saving for one’s golden years and being able to fund a dignified retirement shouldn’t depend on when one retires. Yet, the sequencing of returns is a critical variable for most Americans who have little savings outside of their home equity and what gets put away in a self-directed defined contribution plan. Riding these markets up and down is no way to plan for one’s future. Why do we continue to allow Target Date Funds to be the QDIA when they assume much too much risk for the average investor?

Average 401(k) fund balances, which don’t truly reflect the financial conditions of the average American since many don’t participate in a plan, remain extremely low. Fidelity is reporting that the average 401(k) participant has a balance at year-end of just $103,900, while Vanguard’s average participant has <$113,000. Neither of these account balances will ensure a dignified retirement, especially when one thinks about the 4% rule that would provide them with between $4,155 and $4,502 per year to spend. OUCH! I believe that it would be much more meaningful to provide the median balances for each organization. I’m sure that the output would be chilling!

I’m still flabbergasted by the average returns in 2022 by plan participants of both Fidelity and Vanguard. A traditional mix of 50% in equities (S&P 500) and 50% in bonds (BB Agg) would have resulted in a -15.5% return for 2022. The fact that the average account holder in Fidelity underperformed by 7.5% is both shocking and unacceptable. The average American worker shouldn’t be expected to fund, manage, and then disburse a retirement benefit. It is poor policy to think that they possess the skills needed to effectively execute the job. We need to bring back DB plans or face a retirement crisis that could cripple our economy for generations to come.