Another data point

Yesterday’s blog post highlighted once again why asking untrained individuals to fund, manage, and disburse a retirement benefit (DC offering) is incredibly challenging. We highlighted the fact that fund flows for the month of April showed a significant bias toward fixed income and away from equities. Not surprisingly, U.S. equities massively outperformed during April 2020. Unfortunately, May’s performance results once again reveal a similar outcome, although not quite as dramatic.

For May, the S&P 500 was up 4.8%, while the Bloomberg Barclays Aggregate index advanced only 0.5%. Although bonds have produced two consecutive positive months (2.3%) the opportunity cost associated with moving out of equities in April has resulted in a roughly 16% “loss” for those plan participants that migrated away from equities.

Human nature being what it is, it isn’t surprising to see many investors move away from exposure to equities in April when they’d been tanking day in and day out for more than one month. When a 401(k) balance may represent your only savings, it is troubling to the individual to see one’s hard earned money losing value on a consistent basis, especially for those nearing or recently retired. This is exactly why a defined benefit plan is superior to a DC offering, as pooling of risk and a monthly benefit payout can mitigate this fear-factor.

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