Equities in 401(k)s Rise

In the wake of the 2008 financial crisis, the allocation of investments held by 401(k) plan participants shifted strongly away from equities. This was due to both the precipitous drop in equity valuations and a considerable amount of transfer activity as participants moved assets out of equities and into stable value, money market and other “safe” asset classes. In addition, 20% decreased the amount they were deferring into their plans and the proportion saying their investment strategy was “very conservative” increased to 29% in 2009 from 17% a year earlier. Overall, as shown in the accompanying chart, the proportion of 401(k) assets held in equities dropped to 52% at the end of 2008 from 71% two years earlier.

Today, after two years of strong equity returns, participants have moved back to a more aggressive stance and have 63% of their retirement savings in equity investments. This mirrors behavior seen during and following the 2000-2002 recession and market drop. At that time the proportion of assets held in equities dropped from a high of 69% in 2000 to just 55% in 2002 and then recovered to 62% in 2004.

The apparent conclusion is that, as a group, 401(k) participants are market followers, buying into rising markets and “selling low” during crashes. Spectrem research among participants over the past 15 years has shown that only about 40% express strong agreement with the statement “I have a well-defined strategy for investing my retirement money.” The remainder appear to be quite susceptible to “irrational exuberance” when buying or selling, based on the direction of the market at any given time. For younger participants with a long time horizon this approach may result in growing balances. However, those nearing retirement will continue to be exposed to a significant drop in their retirement money at just the wrong time.