401(k) Observers Detect Shift Out of Stock Funds
Facing the biggest jolt in the stock market since company-sponsored 401(k) retirement plans became a significant part of Americans’ investments, a growing number of investors are beginning to move money out of stock funds.
Although the switching so far involves less than 1% of 401(k) investments, such movement is significant because of the inexperience of many 401(k) investors as well as the sheer amount of money--more than $1 trillion--that they control.
Many are so new to stock investing that the recent market sell-off--the Dow Jones industrial average has declined nearly 16.2% from its July peak--represents their first exposure to a stock market plunge. This group of investors is being watched closely to see how it might behave if stocks continue to fall.
“We’re talking about a situation a lot of these investors haven’t experienced before,” said Clark Blackman, national director of investment advisory development for Deloitte & Touche.
Adds Joel Disend, president and chief executive officer of New York Life Benefit Services: “These are people who’ve grown accustomed to throwing things against a wall and seeing it all go up.”
Money in 401(k) accounts has only recently become an important part of the market. Since 1985, the number of companies offering such plans has quadrupled to about 300,000, often junking traditional pension plans at the same time. In a 401(k), employees, not the company, control how money is invested.
The plans have skyrocketed in popularity--and into the national consciousness--over the past decade at the same time the stock market has been rising at a record rate. Many of these employees have come to expect impressive returns on their money of 20% annually. And Wall Street wonders what they might do when that figure drops--or they start losing money.
According to industry officials, plan participants in August began shifting money out of mutual funds that invest in stocks into more stable options, like money-market funds, so-called stable-value accounts and bond funds. On Monday--when the Dow plunged 6.4%--activity was more than four times the normal level. Surprisingly, movement out of stocks appeared to be especially strong among young investors.
Call volume at Cigna Retirement & Investment Services, the nation’s third largest 401(k) plan sponsor, jumped 80% on Monday. About 40% of those who called actually made a change in their 401(k) plans. Normally, less than 4% of callers actually make a switch.
And of those who switched, 90% moved from equity funds into safer choices. Even Tuesday, when the market rallied after early morning jitters, Cigna officials report heightened trading activity. About half who moved funds were still fleeing stocks for less volatile investments.
The real test, however, may not come for another month, when the nation’s 30 million 401(k) participants begin receiving their quarterly statements, which will likely show the first negative numbers in recent memory.
Brian Bolling, a commercial real estate appraiser, doesn’t have to wait for his quarterly statement to arrive.
“I’m rethinking everything this week,” the 53-year-old Manhattan Beach resident said.
Last year, at the height of the bull market, Bolling took the 20% bond allocation he had in his 401(k) plan and moved it into stocks, making his portfolio completely exposed to equities.
Now that the market has lost 16.2% off its July 17 peak, he is considering moving a bit of that money back into bonds. Or at least into a balanced mutual fund, which is allowed to invest in a mix of stocks and bonds.
There are few constraints as to how individuals can move money around in these accounts, since there are no taxes to pay until withdrawal.
Money that is invested in a 401(k) is tax-deferred, and is not supposed to be touched until retirement--or at least until participants turn 59 1/2 (tapping the account before that age triggers a penalty).
That’s why a major portion of most participants’ accounts should be devoted to stocks, financial planners say. Since 1926, stocks have delivered, on average, returns of 11% a year--despite the fact that since 1953, the market has slumped 15% or more over extended periods 14 times.
Also, 401(k)s are considered effective investments because money is automatically taken out of each paycheck and is regularly invested in the stock market. This assures investors will never invest all their money at the absolute market peak--and it provides the discipline to keep investing during volatile spurts in the market.
One troubling bit of evidence indicates some twentysomething investors may not have have gotten this message.
According to Cigna, 36% of the 401(k) investors who switched out of stock funds into safer options on Friday and Monday were 30 years old or younger. By comparison, only 7% were 30 to 40 years old.
“The only conclusion I can draw is that these are individuals who have never gone through a bear market,” said David Castellani, senior vice president at Cigna.
Ironically, young 401(k) investors are the last group that should move a great percentage of its 401(k) money out of stock funds, financial planners say.
That’s because in general young investors won’t need the money for decades.
One explanation is that young investors may be attempting to “time” the market by jumping in and out of funds.
Indeed, according to Cigna officials, a number of 401(k) plan participants were calling to switch money into stock funds in the first hour of trading Tuesday, when the Dow raced out to a 100-point gain. Then, when a sell-off began in the second hour, more calls came in asking to transfer money out of stock funds.
But mutual funds are priced once a day, so whether investors called in the first hour of trading or in the last, they still sold shares of their fund at the same price. Notes Disend: “I fear that much of the communications and the education our industry has done has been useless.”
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