Market decline

Stock market decline reduces retirement savings

By Alicia H. Munnell

With stocks down 20%, participants lost over $3 trillion

With the S&P 500 down about 20% since the start of 2022, it’s worth considering how this affects the retirement savings of today’s workers.

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The shift from defined benefit (DB) to defined contribution (DC) plans in the private sector means that non-government workers have most of their retirement savings in 401(k)-type plans or accounts. Individual Retirement Plans (IRAs) (see Figure 1). It is important to include IRAs in the calculation because they are largely rollovers of 401(k)s. (Most state and local government workers continue to be covered primarily by defined benefit plans.) To the extent that the money in these private sector accounts is invested in stocks, workers bear the brunt of the risk of stock market fluctuations.

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Vanguard reports that 72% of the 401(k) plan assets the company manages were invested in stocks in 2020. Given the COVID-19 stock market boom, the percentage could be slightly higher at the end of 2021. Ma best guess is that the asset allocation for IRAs would be about the same. Thus, a significant portion of pension assets is at risk.

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One question is, who owns these assets? Again, the data comes from Vanguard. In terms of income, high-income participants took on more market risk — that is, invested more in stocks — than their lower-income counterparts. However, with the increasing use of term funds and automatic adjustment, low-income participants actually have a slightly higher share of their equity assets (see Table 1).

It is also important to understand which age groups are exposed to fluctuations in stock market values. If younger employees owned most of the stock, they would have time to recoup and recoup losses before retirement. In terms of age, stock holdings decline as participants age, but those age 65 and over continue to hold nearly half of their portfolio in stocks (see Figure 2). To the extent that these seniors are forced to dip into their retirement assets, they will have no chance of recovering.

So how much have people lost in their retirement plans during this market downturn? Let’s assume the markets are down about 20% since January. Participants would have lost 20% of $6.8 trillion ($9.5 trillion x 72%) or $1.4 trillion in their 401(k); and IRA owners would have lost 20% of $10.0 trillion ($13.9 trillion x 72%) or $2.0 trillion on these accounts. Remember that IRAs are primarily 401(k) rollovers and therefore should be counted in the total.

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One could argue that these recent losses simply wipe out the extraordinary gains of COVID-19, so participants are actually no worse off than before the pandemic. But it’s human nature for people to feel that past gains belong to them, so recent losses are painful.

People – mainly the wealthier ones – also own stocks outside of retirement accounts. In 2021, these holdings amounted to $32.2 trillion. Applying the 20% cut means people lost an additional $6.4 trillion in direct assets. These people, however, are much less likely to be forced to sell and can wait until the decline is over to recoup their losses.

We all know that the move from defined benefit pension plans to defined contribution pension plans shifted longevity and investment risk from employers to workers. It’s easy to overlook this fact when the market is booming; hard to ignore when the market crashes.

-Alicia H. Munnell


(END) Dow Jones Newswire

06-21-22 2122ET

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