When the stock market declined by 35% between its February peak and March trough, it revealed the extent to which retirement accounts are exposed to equity market risk, according to the latest brief from the Center for Retirement Research at Boston College (CRR).
While the market has largely recovered since then, it remains very volatile and exposes retirement savings to continued market risk. As a result of the 35% drop, the CRR brief reports the value of equities in employer-sponsored retirement plans and household portfolios fell by $14.2 trillion. Of that decline, $4.4 trillion occurred in 401ks and IRAs, $1.8 trillion in public and private defined benefit plans and the remaining $8 trillion occurred in household non-retirement assets.
The new CRR brief, “How Exposed are Retirement Savings to Market Risk?” by Anqi Chen and Nilufer Gok documents not only where the declines occurred, but the extent to which retirement accounts are exposed to equity market risk.
“The declines also highlight the fragility of our retirement plans,” the brief’s introduction states. “More than two-thirds of the drop in retirement plan equity holdings was in defined contribution plans. As defined benefit plans become rare, households increasingly bear the full brunt of market turmoil.”
Much of the discussion about reforming private sector retirement plans has focused on extending coverage, the brief continues. “But the current financial downturn also underlines the need to construct arrangements where the full market risk does not fall on retirement plan participants.”
The brief notes that nearly three-quarters of 401k/IRA assets are allocated to equities. “The bottom line is that a substantial portion of household financial assets were exposed to the recent stock market drop.”
While pension plan participants were sheltered from any immediate impact of the $1.8 trillion in losses, DC plan participants and IRA owners did experience a direct hit on the $4.4 trillion of losses in 401ks and IRAs.
“As a result, a substantial portion of household financial assets were exposed in the recent market downturn. Some employees may have panicked amid the turmoil and sold assets at depressed prices. And these people may have been late in getting back into the market to enjoy gains as the market has recovered,” the brief concludes. “Equally important, holders of 401ks/IRAs were left feeling vulnerable as their savings evaporated. Other arrangements are possible, such as those in the Netherlands and elsewhere, where employers and employees share the risk of market declines in workplace retirement plans.”
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
