A study of more than 4 million 401(k) plans shows that workers are doing better at saving for retirement. However, in a signal of potential economic headwinds, more are also taking emergency withdrawals and borrowing from their accounts.

The quarterly Bank of America Participant Pulse report shows that 401(k) balances are up an average of 9.6%, or $7,250, so far this year. However, the report also showed higher hardship withdrawals and account loans.1

“The data from our report tells two stories—one of balanced 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.

The report monitored the behavior of more than 4 million plan participants from Bank of America clients. It showed an increasing trend for hardship distributions, with 0.52% of 401(k) plan holders taking emergency withdrawals in the second quarter, up from 0.46% in the first quarter2, 0.4% in the 2022 fourth quarter, and 0.3% from last year’s second quarter. The average hardship withdrawal was $5,050.3

More people are borrowing from their 401(k)s, with 2.5% of plan holders taking a loan in the second period, an increase of 2.3% over the same period from 2022 and 1.9% in this year’s first quarter. The average loan was $8,550.

“This year, more employees are understandably prioritizing short-term expenses over long-term saving,” Sabbia said.

The data on early retirement withdrawals comes as economists look for signs of whether a recession will occur from the Federal Reserve’s efforts to curb inflation or whether the economy will experience a “soft landing.”

Gen Z, Millennials Boost Retirement Savings

Rising withdrawals didn’t impact the overall savings rate, which remained at 6.5% throughout the first half of 2023, the report showed.

Overall, millennials, born 1981-2000, and Gen Z, born 2001 and later, increased their 401(k) contribution rate more than any age group. The report showed 19.3% of Gen Z increasing their contributions and 11% of millennials, above the average 10.2% of participants who increased their contribution rate in the first half of 2023.

Gen X, born 1965-1980, relied the most on loans, with 22.8% from that age group borrowing from their retirement accounts, while 14.5% of millennials took similar loans.

HSA Accounts Also Rising, With Baby Boomers Leading Adoption

To provide a complete look at financial preparedness, the report expanded its scope to include Health Savings Accounts, which provide similar tax benefits for saving but can be used for healthcare spending with no early withdrawal penalties. In the first half of 2023, HSA balances increased by 11.9% over the 2022 year-end. And while only 12% of 401(k) account holders also had HSA, baby boomers, born between 1946 and 1964, used the accounts at a rate of 15%.

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