Heading into the last weeks of 2023, the S&P 500 appears poised for a gain, which should cheer workers saving for retirement in their employer-sponsored 401(k) plans.
Additionally, in mid-December, when Federal Reserve Chairman Jerome Powell signaled that the Fed may be cutting interest rates in 2024, markets took off. This added jet fuel to the year-end rally that began in November.
That said, most investors’ 401(k) accounts consist of more than the S&P 500, including varied asset classes such as bonds, international stocks and small-cap stocks.
So how did those 401(k) accounts do this year? Here’s what to know about 2023 retirement investment performance.
[Read: How to Invest $100K for Retirement]
401(k) Account Balances in 2023
The average 401(k) balance decreased in the third quarter of 2023 to $107,700 from $112,400 in the second quarter, according to November data from brokerage Fidelity.
That average balance was up significantly from the year-earlier quarter, however, as the market rallied in the first seven months of 2023.
Additionally, Fidelity, Vanguard and Bank of America reported that a growing number of retirement savers are taking hardship withdrawals. Account owners are eligible for those withdrawals without penalty if they claim a qualified hardship, such as purchasing a primary residence, avoiding eviction or foreclosure, and dealing with a medical emergency or loss due to a natural disaster.
In August, Bank of America’s 2023 Participant Pulse report also found that more Americans were borrowing from their 401(k)s.
“The data from our report tells two stories — one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals,” said Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America, in the report’s release.
She added that more employees were “understandably prioritizing short-term expenses over long-term saving. However, it’s critical that employees continue to invest in life’s biggest expense — retirement.”
A 401(k) is one of the most valuable benefits offered to employees these days, said Brian Terry, a certified financial planner at Blue Marlin Advisors in Winter Park, Florida, in an email.
“Fully participating in your company’s 401(k) is critical to reaching one’s financial goals,” he said. “Employees should contribute up to the company’s match as a minimum. If not, they are actually working for a reduced salary.”
[Related:What Is the Outlook for Retirement in 2024?]
Best-Performing Asset Classes in 2023
So far in 2023, the top asset classes and their performance, according to asset manager BlackRock, are as follows:
— U.S. equities: 21.4%
— Japan equities: 15.7%
— Europe equities: 14.9%
— High-yield bonds: 9.6%
— Emerging market equities: 6.1%
Investors with a tilt toward stocks should see an increase over 2022 as the year wraps up. As 401(k) contributors are, by definition, in their working years, most opt for a greater allocation to stocks than bonds, meaning they were likely able to take advantage of stocks’ gains this year.
In its 2024 outlook, BlackRock said its portfolio managers were underweight the broad U.S. market, the best asset class of 2023. However, U.S. stocks are still the asset manager’s largest portfolio allocation.
“Hopes for rate cuts and a soft landing have driven a rally. We see the risk of these hopes being disappointed,” BlackRock analysts wrote.
The technology, communications services and consumer discretionary sectors are the best performers among domestic stocks in 2023. All three sectors track growth stocks, which benefited from investors’ growing belief that the Federal Reserve may cut interest rates in early 2024.
In the first seven months of the year, cost cuts and the potential of artificial intelligence boosted tech stocks. Investors whose 401(k) plans had a tilt toward domestic stocks were able to ride that wave of optimism in 2023.
“The volatility in 2023 provided a great opportunity in many high-priced stocks that pulled back,” said Walter Richardson, CEO of Richardson Wealth Management in Los Angeles, in an email.
“Artificial intelligence stocks gave us plenty of volatility, but the strong ones like Nvidia and Advanced Micro Devices gave our portfolio a nice end-of-year pop,” Richardson added.
Worst-Performing Asset Classes in 2023
BlackRock found that so far this year, the five worst-performing asset classes and their performances are:
— China equities: -8.8%
— Developed market government bonds: -0.1%
— Real estate investment trusts: 1.7%
— Infrastructure equities: 2.4%
— Commodities: 3.3%
Chinese stocks performed badly in 2023 due to a slower-than-expected rebound after the country finally opened its borders after three years of COVID-19 closure.
Regardless of how the worst-performing asset classes did in 2023, diversification in a 401(k) mitigates risk.
Plenty of investment research has shown that it’s impossible to consistently predict which asset classes will perform well in any given year. Investors who hold the poor performers in their portfolio may feel some regret, but it’s not unheard of for one year’s laggards to join the ranks of leaders the next year.
[READ: How Much Should You Contribute to a 401(k) in 2024?]
401(k) Savings Rate in 2023
According to a recent study by retirement plan record keeper Empower, savings rates have hovered around 8% since at least 2021.
Two-thirds of savers Empower surveyed said they have no plans to sell assets or investments, and 69% don’t plan to reduce their retirement savings account contributions.
Empower’s survey found that savings rates by generation remained flat or inched up over the past year. Baby boomers are saving the most and have average savings rates 74% greater than Generation Z savers, according to Empower.
The baby boom generation is also the most likely to take advantage of an employer match.
In a statement accompanying Fidelity’s 401(k) balance update, Kevin Barry, the brokerage’s president of workplace investing, said, “Americans have become accustomed to riding the economic waves of the past several years, and this quarter is no different.”
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How Much Did 401(k)s Gain in 2023? originally appeared on usnews.com
Update 12/14/23: This story was previously published at an earlier date and has been updated with new information.
