Retired savers seeking havens in 401(k) plans may regret it

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Retired savers seeking havens in 401(k) plans may regret it
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The data suggests that some savers are looking for safe havens in their 401(k) plans.

But this decision could hamper these long-term investors; in fact, he may have done so last month.

Investors sold target date funds and large-cap U.S. equity funds in October in favor of “safer” funds, such as stable-value, money market and bond funds, according to Alight Solutions, which administers the company’s 401(k) plans.

For example, stable-value and money-market funds captured 81% and 16% of investors’ net funds, respectively, in October, according to data from Alight.

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Money market funds are considered “cash equivalents”, while stable value funds generally offer a constant rate of return.

Retired savers appear to have been spooked by the sharp swings in stocks last month, having already suffered heavy losses in 2022 amid concerns over inflation, interest rates, geopolitical unrest and to other factors.

Target maturity funds and large-cap equity funds accounted for 37% and 12% of net investor withdrawals, respectively; corporate equity funds accounted for 34% of total outflows, according to Alight.

Target date funds, the most popular funds with 401(k) plan investors, offer a mix of stocks and bonds that match a person’s expected retirement year (their target date, for so to speak). The composition becomes more conservative as retirement approaches.

According to Alight, 18 of the 21 trading days in October favored the fixed income category over equity funds. Investors favored fixed income securities for 73% of total trading days in 2022.

Still, the best bet for investors — especially those with many years or decades before they can dip into their retirement savings — is likely to stay put, financial advisers say.

Selling stocks out of fear is like making a bad driving decision, said Philip Chao, director and chief investment officer at Experiential Wealth in Cabin John, Maryland.

“If you panic while driving, you’ll have an accident,” Chao said.

“I think most investors are reactionary, rather than deliberate and well-intentioned,” he added. “And because of that, they tend to be everywhere when markets fall.”

Why “loss aversion” hurts investors

That’s not to say there’s been a stock rush to more conservative holdings. The overwhelming majority of 401(k) investors did not trade at all in October. Those who did, however, may regret it.

Selling stocks when there is proverbial blood on the streets is akin to timing the market, Chao said. To come out on top, investors need to time two things perfectly: when to sell and when to buy back.

And it’s almost impossible to do, even for professional investors.

Making the wrong bet means you are likely to buy when stocks are expensive and sell when they are cheap. In other words, a knee-jerk reaction by protecting your money means that you can, in many cases, do the opposite: sacrifice your future earnings and ultimately end up with a smaller nest egg.

I think most investors are reactionary, rather than deliberate and well-intentioned.

Philip Chao

director and chief investment officer at Experiential Wealth

The S&P 500 Indexa barometer of U.S. equity returns, lost almost 6% in early October, compared to the market close Oct. 4-12. However, it rebounded during the month, eventually closing October with a gain of around 8%. .

Investors who sold their shares early would have missed out on this rally. If they hadn’t bought back, they would also have missed a 5.5% rise on Nov. 10, the biggest rally in more than two years, as the stock market applauded softer-than-expected inflation data. .

The S&P 500 is down about 17% in 2022.

Ultimately, a risk-free investment does not exist, Chao said. Stocks generally carry higher risk than fixed income investments, but also have much greater growth over longer periods of time.

But investors tend to have an emotional bias against losing money. “Loss aversion,” a tenet of behavioral finance, holds that investors feel the pain of a loss more strongly than the pleasure of a gain, wrote Omar Aguilar, CEO and Chief Investment Officer of Schwab Asset Management. .

He cites research showing that in 2018, a year in which there were two major market corrections, the average investor lost twice as much as the S&P 500.

Prioritizing avoiding losses over making a gain “is one of the main reasons why so many investors underperform the market,” Aguilar said.

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