401(k) Investing—Is it Different This Time?!

It’s not as though we haven’t been through tumultuous times before, but is this time different?

 

Just four months ago, we were reviewing 2019 401(k) investment performance where the S&P 500 index rose 28+%, the Dow Jones Industrial Average (DJIA) gained 22+% and the NASDAQ was up an even better 35+%![1] Sure, we were coming off a difficult 4th quarter 2018, but those were sizeable, dramatic gains. 

 

Then, over the next 50 or so days, through February 12th and 19th, we saw these same indices improve to record highs. The S&P 500 increased another 4%, the DJIA another 2% and the NASDAQ 8%. 

 

 

	Percentage Change, 1/1-2/19	Percentage Change, 2/20-3/23	Percentage Change, 3/23-5/7	Below All-Time High
S&P 500	4	-34	29	15
DJIA*	2	-37	28	19
NASDAQ	8	-30	31	9

* DJIA high on 2/12, S&P and NASDAQ on 2/19; all three had lows on 3/23.

 

After the close on May 7, all three indices have pretty much given back gains within some/all of the past 12 months:

 

We’ve seen large drops in the past, though perhaps without quite as much volatility. According to the Chicago Board Options Exchange Volatility Index, the all-time high of 89.53 was reached on Oct. 24, 2008, at about the crest of the financial crisis, although it closed that same day at 79.12. [2] The level stood at 82.69 on Monday, March 16.

 

Not so different, however, are the typical 401(k) investment structures and participant investment behaviors. 

 

Comparing survey information prior to the dot-com collapse, the Great Recession and this time[3],  shows:

 

It's (Not So) Different This Time

	1999	2008	2018
Average Number of Investment Choices	11	18	19
Average Number of Fixed Income Options	2	2	3.9
Percentage of Plan Assets in Fixed Income	12.2	28.8	18.2

 

 

Target Date/LIfestyle Fund Preference

	Access	Assets Allocated
1999	21%	0.7%
2008	78%	8.8%
2018	79%	22.7%

 

 

However, as Yogi Berra once opined, “It's tough to make predictions, especially about the future.”[4] 

 

Where might things stand at year end 2020:

 

 

And, of great concern to plan sponsors, among workers who remain employed and those only temporarily furloughed, will in-service distributions explode following Congressional actions to liberalize access (enhanced in-service withdrawals possible following changes made by the Bipartisan Budget Act of 2018 and the SECURE and CARES Acts, as well as the enhanced plan loan provisions as permitted by CARES?[9]

 

From an investment perspective, each withdrawal and loan effectively reallocate assets into a fixed-income investment in the participant.    

 

All that said, chances are, the year-end 2020 investment and account balance data will consolidate many trends, dislocations and changes, including:

  

Remind us to check in and follow-up next year. And yes, there will be a next year… and a “next time.”

 

 

[1] F. Imbert, Stocks post best annual gain in 6 years with the S&P 500 surging more than 28%, CNBC, 12/31/19, Accessed 5/7/20 at: https://www.cnbc.com/2019/12/31/dow-futures-last-trading-day-of-2019.html

[2] VIX, 2020 year to date. The Chicago Board Options Exchange Volatility Index, or VIX, is a real-time market index that represents the market's expectation of 30-day forward-looking volatility. It provides a measure of market risk and investors' sentiments. The all-time high of 89.53 was reached on Oct. 24, 2008, at about the crest of the financial crisis, although it closed that same day at 79.12. 

 

[3] Plan Sponsor Council of America Annual Surveys, 43rd, 51st and 62nd

 

[4] Yogi Berra.

 

[5] J. VanDerhei, S. Holden, L. Alonso, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2009, Employee Benefits Research Institute, 11/22/10.  “… the average 401(k) retirement account fell 27.8% in 2008, before rising 31.9% in 2009 to $109,723 at year-end 2009.  The median (or midpoint, half above and half below) 401(k) account balance increased … to $59,381 at year-end 2009. Accessed 4/8/20 at: https://www.ebri.org/publications/research-publications/issue-briefs/content/401(k)-plan-asset-allocation-account-balances-and-loan-activity-in-2009-4707

 

[6] Pension Rights Center. There are a variety of different forms of freeze, some stop all accruals, while others may index covered compensation for calculating benefits based on income subsequent to the date participation service accruals are suspended. Accessed 4/1/20 at: https://www.pensionrights.org/publications/fact-sheet/pension-freezes Pension Rights Center. “Plans have been amended to offer term vested and retired workers a lump sum in lieu of monthly payments. This may affect monthly payments that have commenced, and monthly payments that are scheduled to commence at a later date.  Depending on liquidity needs and desires, some tern-vested and retired participants might prefer a lump sum at this time.” Accessed 4/1/20 at: http://www.pensionrights.org/publications/fact-sheet/companies-are-offering-lump-sum-pension-buyout Pension Rights Center. Accessed 4/1/20 at: http://www.pensionrights.org/publications/fact-sheet/companies-have-changed-or-temporarily-suspended-their-401k-matching-contribu

[7] Department of Labor, 3/26/20, Accessed 3/30/20 at: https://www.dol.gov/ui/data.pdf Department of Labor, 4/2/20, Accessed 4/2/20 at: https://www.dol.gov/ui/data.pdf
 

[8] Bureau of Labor Statistics, Accessed 4/8/20 at: https://data.bls.gov/timeseries/LNS14000000 See also: M. Hulbert, Why people who claim Social Security early often live to regret it. Marketwatch, 8/29/19, Accessed 4/8/20 at: https://www.marketwatch.com/story/why-people-who-claim-social-security-early-often-live-to-regret-it-2018-09-04

 

[9] Pub. L. 115–123, Pub. L. 116–94, Pub. L. 116-136, respectively.