The next crash might not be as horrific as 2008, but there will be a next crash and it is likely to happen in this decade, a decade that is the Risk Zone for most Baby Boomers.
The biggest target date fund (TDF) loss occurred in 2008 when the average 2010 fund (for those near retirement) lost more than 30%, causing an uproar that led to the June 2009 all-day joint hearing of the SEC and DOL to address the catastrophe; nothing changed.
A 2008-level stock market crash today will be 17 times worse than 2008 for TDF losses, and it will affect 7 times more people.
It will be a much worse catastrophe. It’s like current thermonuclear weapons with 100 kilotons of power versus WWII nuclear bombs with 20 kilotons, except 17 times worse rather than just 5 times, plus a certain large group of people—Baby Boomers—are at ground zero.
TDFs were new in 2008, having been launched for 401(k)s by the Pension Protection Act of 2006. They have grown exponentially since then. The bigger they are, the harder they fall, so brace for impact.
Target date funds will lose more than $1 trillion this time in a 2008-level crash, versus only $60 billion back in 2008. A trillion dollars is a lot of money—it’s one followed by 12 zeroes. A 30% loss today on the current $3.5 trillion in TDFs is more than $1 trillion, whereas the 30% loss in 2008 was on $200 billion in TDFs, so “only” $60 billion.
Intensifying the pain, there are 7 times more people in TDFs today than there were in 2008 and Boomers are now near retirement. There were 5 million TDF participants in 2008. There are 37 million today. Baby Boomers are especially vulnerable at this time in their lives.
Boomers were not in the Risk Zone in 2008, but they are today. Losses in the Risk Zone can wreck the rest of life.
Baby Boomer specifics
There is a Retirement Crisis in the U.S. According to DQYDJ, 70% of Baby Boomers (55 million people) have saved less than $300,000. This is not much money, but I explain in my book how it can be stretched to support a reasonable lifestyle, a lifestyle that can be better than that in many other countries. But you really need to be disciplined and frugal, and dependent on Social Security and Medicare—it’s not easy, but doable.
According to EBRI, the average account size in 401(k)s among Boomers is $350,000, somewhat higher than the 70% level of $300,000. Most will have other assets outside their 401(k), but we’ll use the $350,000. Most Boomers in 401(k) plans are invested in TDFs. Specifically, they’re in 2020 and 2030 funds.
A 30% loss is $105,000, bringing the average balance below the $300,000 I write about in the book. The Retirement Crisis becomes a horrendous crisis.
No one can afford a 30% loss of their lifetime savings, but losses to savings that are already bare minimum are catastrophic, especially losses in the Risk Zone. Some will say that losses in TDFs are no worse than losses in delf-directed accounts, and that may be true, but TDFs are supposed to protect those near retirement versus self-directed people who are supposed to protect themselves—it’s on them.
Why it matters
It matters because a lot of people who think they’re safe could lose a lot of their lifetime savings. Baby Boomers should be protected in TDFs because surveys show that Boomers want (and believe they have) protection. Their need for safety has been ignored by TDFs. For society, many Baby Boomers will become more dependent on social programs that are already stretched to their limits.
It matters because no one cares, yet—we’re numb to the very notion of a crash. But when (not if) it happens, millions of people in TDFs will be shocked and angry, especially Baby Boomers. They do not have time to recover from big losses, so “Stocks for the long run” is not a sensible slogan for them.
It matters because shocked and angry participants will look to their employers for restitution in various forms like higher wages, increased savings plan contributions and even a return to defined benefit pensions. The most senior people in a company are Baby Boomers, so they are influential.
And there will be grounds for excessive risk lawsuits. After all, where there’s harm, there’s a foul. Baby Boomers might hope to recover some of their losses while they’re still alive.
It matters because TDFs never should have been as risky as they are near the target date. TDFs would have been much safer if they followed the academic theory that they say they follow.
It matters because profits conflict with participant safety since risky investments earn higher fees.
It matters because plan consultants think that procedural prudence dictates using the most popular TDFs even though substantive prudence argues for greater safety. There actually are safe TDFs, but they are not popular.
But of course, it won’t matter until it does. As Mike Tyson observes, “Everyone has a plan until they get punched in the mouth.” We will learn what “risk” means. We haven’t actually seen it for the past 15 years. Millennials have not experienced stock market crashes.
Will a crash happen?
Of course!!
Every day that goes by:
- The magnitude of the loss grows because people and contributions continue to flood into TDFs
- The dangers to the economy and stock market increase. The next crash could easily be worse than 2008. And this time, bonds will not defend.
- The probability of a market crash increases, because the next one is long overdue. Losses in 2022 were just a head fake and a warning of more to come. Deeper setbacks lie ahead. As the bubble inflates, the burst becomes more overwhelming.
Conclusion
Fear mongering is called the Chicken Little syndrome, described as “inferring catastrophic conclusions possibly resulting in paralysis.”
There’s a huge distinction between fear mongering and serious warnings. Unlike fear mongering, warnings are intended to generate action rather than paralysis. We’ll feel the difference when the stock market crashes. It always does.
As aptly explained in “The Consequences of a Market Correction,” stock markets will crash because they routinely crash. Just look at the following graph created by Morningstar researcher Paul D. Kaplan in 2020:
FOMO and YOLO are popular acronyms. Unless they’re in a safe TDF, Boomers should choose YOLO—You Only Live Once. They should sell out of their TDFs and move to safety, like Treasury Bills and intermediate-to-short term Treasury Inflation Protected Securities (TIPS) and stay there for the rest of this decade.
Some so-called “hybrid QDIAs” move participants out of TDFs as they near retirement and into managed accounts, with the implied intention of protecting savings. The fact that these exist is a recognition of the problem and the importance of the Risk Zone.
Boomers should ignore the Fear of Missing Out (FOMO) at this time in their lives because once their savings are gone, they’re gone—no do-overs. The next crash might not be as horrific as 2008, but there will be a next crash and it is likely to happen in this decade, a decade that is the Risk Zone for most Baby Boomers.
Safe TDFs include the Federal Thrift Savings Plan (TSP) and the Office Professionals Union (OPEIU).
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