The average 401(k) balance just got a haircut. Fidelity, which runs more 401(k) plans than any other firm in the country, reported that retirement balances dropped 4% in the first quarter, and the drop wasn't the worst part of the report. More Americans pulled money out of their accounts to cover the bills.
Fidelity's first-quarter data dropped Thursday, with the average 401(k) balance falling to $141,000 and the average IRA balance falling to $131,380. Both are down 4%.
The reason is the war. After the U.S. and Israel attacked Iran on February 28, the market sold off hard, with the S&P 500 losing 5.1% in March, its worst monthly performance since 2022. The Dow dropped 5.4%, snapping a 10-month winning streak, and the Nasdaq slid 4.8%.
The good news: markets have since rebounded. As of Wednesday's close, the Dow is up about 5.3% year-to-date, the S&P 500 is up nearly 10%, and the Nasdaq is up 14.8%.
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The more worrying line in Fidelity's report is what people are doing with their money. The share of workers with an outstanding 401(k) loan at the end of Q1 was 19.2%, up from 18.8% a year earlier, and about 2.4% of workers took a new 401(k) loan in the first quarter alone.
Hardship withdrawals climbed from 2.3% a year ago to 2.5% now, with the savers using them to pull money out without the early-withdrawal penalty, but only for an "immediate and heavy financial need" per the IRS.
Kirsten Hunter Peterson, vice president at Fidelity, said most hardship withdrawals run under $2,000. The pattern she's watching is workers taking more than one in a year, which is the warning sign.
Pulling money from a retirement account during a downturn is like selling your house mid-move. Douglas Boneparth, a certified financial planner at Bone Fide Wealth in New York, said the taxes and 10% penalty hurt, but "the long-term compounding loss is even larger."
His quick fix: if budgets are tight, redirect even $25 to $50 a month into a high-yield savings account before cutting your retirement contributions, with the cushion saving your portfolio from emergency withdrawals later.
For investors who stayed put through the war, the average 401(k) contribution rate ticked up to a record 14.4% (employee plus employer), just shy of Fidelity's recommended 15%.
The next data point will show whether savers used the market rebound to catch up, or whether the hardship trend keeps climbing as households stay squeezed by the war and prices. Inflation and the war haven't gone anywhere.
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