401(k), HSA Balances Rose in 2023

Persistently high living costs, financial hardships and economic volatility have hindered many people’s retirement savings in the past few years, but recent data points to some positive news: 401(k) and health savings account (HSA) balances were up significantly in 2023. 

Research by Bank of America (BoA) found that 401(k) account balances rose 15 percent year-over-year to an average of $86,280 in 2023 (up from $75,045 at the end of 2022), while HSA balances rose 11 percent in 2023 to an average of $4,380 (up from $3,930 in 2022). The BoA report, released this month, monitors the behavior of some 4 million full-year participants.

Higher contributions from employees were among the main reasons for the increases. 

Nearly 18 percent of 401(k) plan participants increased their contribution rates last quarter in particular, up from just over 9 percent who did so in the third quarter of 2023. The average 401(k) contribution rate in the fourth quarter was 6.5 percent, up slightly from the 6.4 percent average at the end of the fourth quarter in 2022.

Meanwhile, 37 percent of HSA holders contributed more than they withdrew in 2023.

“These insights offer signs that people are prioritizing their retirement savings, with more employees increasing their contribution rates and fewer taking hardship distributions,” said Lorna Sabbia, head of retirement and personal wealth solutions at BoA.

The research found that fewer participants borrowed from their 401(k) plan (2.3 percent in the fourth quarter of 2023, down from 2.5 percent in the third quarter), and the average loan per participant declined to $8,210 (compared with $8,530 in Q3). Less than 1 percent (0.57 percent of participants) took hardship withdrawals during the fourth quarter, down slightly from the previous quarter, with an average amount of $4,370, the lowest quarterly average of 2023.

Meanwhile, employees also got more serious about their HSAs—another positive sign as industry experts tout the savings vehicle with its triple-tax advantages as a smart way for employees to save for and pay medical bills, as well as to save for their post-work years. More than three-quarters of HSA contributions went to health care expenses, while 24 percent were saved, the analysis found.

Millennials saved 34 percent of their HSA contributions, the highest of any generation, according to the report.

Reversal of Trends

The data is a positive development after some dismal news on retirement in the past year.

In 2023, both workers’ and retirees’ confidence in having enough money to live comfortably throughout retirement fell to the lowest rate since the Great Recession, dropping to 64 percent from 73 percent in 2022 among workers and to 73 percent from 77 percent in 2022 among retirees, according to data from the Employee Benefit Research Institute (EBRI) and Greenwald Research.

And sky-high inflation, the pandemic and other woes have caused a significant number of employees to turn to their 401(k)s for funds. Nearly a third (30 percent) of workers tapped into their retirement savings over the past 12 months to pay for short-term expenses, according to a December Betterment at Work survey.

Plus, employees have been fretting over seeing their 401(k) balances fluctuate due to significant stock market swings.

But the BoA report may indicate that economic pressures are turning around, said Lisa Margeson, managing director of retirement research and insights at BoA.

“We’re currently seeing positive broader economic signs, such as inflation steadily declining and the job market accelerating, so we’re hopeful this report is an early signal that Americans are also feeling more confident about their retirement savings,” she said. “With more employees increasing their 401(k) contribution rates, this data suggests we could be making a positive turn.”

Tracking how these trends evolve over the next few quarters, she said, “will tell us if this is a true shift in trajectory.”

Margeson said employees should keep making contributions to their 401(k)s and HSAs because of the financial benefits.

“401(k)s are a tax-free retirement plan. The compound interest of your savings really adds up, and the amount of money you put away in your early years will grow exponentially by the time you’re ready to retire,” she explained. “Saving for health care is equally important, considering that the cost of health care tends to outpace inflation. When you contribute regularly to an HSA, over time, you can potentially build up your balance for unexpected major medical expenses at different life stages, better preparing yourself for your financial future.”

Employers and HR leaders should talk to their employees about retirement savings to better position them for success, she said.

“The more employers provide this guidance to their employees, the better prepared these employees will feel about their retirement,” Margeson said.