The equity market reaction to the Covid-19 lock-down was destabilizing! Many professionals were torn on what to do in the face of this unprecedented event. Why would we believe that less-trained 401(k) “investors” would behave in a manner different than how they have reacted during most, if not all, market corrections? Regrettably, they didn’t.
Data from Alight Solutions 401(k) index show that in April bond funds received 31% of all retirement fund flows, while money market funds received 18% of the flows. Somewhat surprising was the fact that 19% of the money went to self-directed brokerage accounts. Which funds were the big losers? Target-date-funds accounted for 44% of the outflows, while company stock (24%) and large cap equity (16%) also saw meaningful withdrawals.
It is really disappointing to see the flows from the TDFs, since they are professionally managed asset allocation pools designed to be long-term holdings for individual investors geared to projected retirement dates. What is equally troubling is that equity markets rallied tremendously in April, as the S&P 500 advanced by 12.8%, while the Barclays Bloomberg Aggregate Index was up only 1.8%. Interest rates continue to rise slowly, which will further erode the principal in bonds.
Defined contribution participants have once again shown that they often time their allocation decisions at the most inappropriate time. Selling equities and buying bonds in April locks in substantial losses. If our economy opens up in any meaningful way it is likely that bond yields will continue to rise putting pressure on bond prices. For many 401(k) investors, this activity is damaging to their ability to build a meaningful retirement fund that will provide them with the opportunity to retire with dignity, if they can retire at all.
For those individuals fortunate enough to be in a professionally managed defined benefit plan, you were not asked to make an asset allocation or funding decision during this volatile time. You may have been wondering how your fund was holding up, but as we reported last week, most DB plans have the financial wherewithal to meet benefit payments long into the future. The anxiety and uncertainty experienced by defined contribution participants are palpable. Recent government legislation permitting early withdrawals from DC plans is only compounding the long-term implications!