The U.S. economy has remained surprisingly resilient over the past year in spite of rising living costs and the Federal Reserve’s aggressive tightening of monetary policy. Household debt has been steadily rising, however, with credit cards balances seeing “brisk growth” in the second quarter of the year to surpass $1 trillion for the first time, which has some analysts warning a major decline in consumer spending could be right around the corner.

In a report published Tuesday, Bank of America now found that an alarming number of people were making withdrawals from their 401(k) plans.

The data came from the latest instalment in the bank’s Participant Pulse report, which monitors the behavior of more than 4 million participants in its record-keeping clients’ employee benefits programs..  

It showed that in the second quarter of 2023, the number of participants taking what are called “hardship distributions“—a 401(k) withdrawal made due to an immediate and heavy financial need—had surged.

Not only did it jump 36% from the same period a year ago, the number of people taking hardship distributions also sequentially increased by 12% over the immediately preceding first quarter.

That meant almost 16,000 of the study participants needed immediate financial aid in the three months to June.

The average hardship amount taken in the second quarter was $5,050, according to Bank of America. This represented an improvement over the previous year’s period, however, when an average $5,400 had been taken out.

Meanwhile, the overall number of people dipping into their 401(k) fund also increased, with 2.5% of participants—or 75,000 account holders—taking a loan out against their workplace plan.

Between April and June, roughly a third more participants had borrowed cash from their 401(k) than in the preceding three months of this year.

Millennials and Gen Z socking more money away for retirement

Despite 401(k) holders taking cash out of their accounts at an increasing rate, BofA said on Tuesday that the average contribution rate had remained steady at 6.5% of income.

Between April and June, the average 401(k) holder made contributions of $1,460 to their account, with the average account balance standing at $82,300—up almost 10% from the end of 2022.

More participants increased than decreased their contribution rate, the stats showed, with millennial and Gen Z employees leading the way on increasing their contributions.

“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,” Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America, said in a statement. “This year, more employees are understandably prioritizing short-term expenses over long-term saving. However, it’s critical that employees continue to invest in life’s biggest expense—retirement.”

Bank of America isn’t the only major 401(k) provider to have noticed changes in retirement fund trends over the past year amid widespread financial anxiety.

Investment management firm Vanguard released data at the end of last year that showed retirement savers were dipping into their funds at an increasing rate, with hardship withdrawals across its funds on the rise.  

According to Vanguard, the average retirement account balance plummeted 20% between 2021 and 2022, while Fidelity Investments said the number of 401(k) and IRA millionaires fell by 30% last year as retirement savings took a hit—thanks largely to volatile markets.

This could prove problematic for an economy that depends on private consumption for roughly two-thirds of its growth.