Data suggests some retirement savers are seeking out safe havens within their 401(k) plans.
But the move may hobble those investors in the long run; in fact, it may have done so just last month.
Investors sold out of target-date funds and large-cap U.S. stock funds in October in favor of “safer” ones, such as stable value, money market and bond funds, according to Alight Solutions, which administers company 401(k) plans.
For example, stable value and money market funds captured 81% and 16% of net investor funds in October, respectively, according to Alight data.
Money market funds are thought of as a “cash equivalent,” while stable value funds generally offer a steady rate of return.
Retirement savers seem to have been spooked by wild swings in stocks last month, after having already suffered big losses in 2022 amid worries tied to inflation, interest rates, geopolitical turmoil and other factors.
Target-date funds and large-cap stock funds accounted for 37% and 12% of net investor withdrawals, respectively; company stock funds accounted for 34% of total outflows, according to Alight.
Target-date funds, the funds most popular with 401(k) plan investors, offer a mix of stocks and bonds that align with someone’s expected retirement year (their target date, so to speak). The mix becomes more conservative as retirement approaches.
Eighteen of 21 trading days in October favored the “fixed income” category relative to stock funds, according to Alight. Investors favored fixed income during 73% of total trading days in 2022.
Yet the best choice for investors — especially those with many years or decades before they’ll tap their retirement savings — is probably to stay put, according to financial advisors.
Selling stocks out of fear is like making a bad driving decision, said Philip Chao, principal and chief investment officer at Experiential Wealth in Cabin John, Maryland.
“If you panic while driving, you’ll get in an accident,” Chao said.
“I think most investors are reactionary, instead of acting in a purposeful, well-intentioned way,” he added. “And because of that, they tend to be all over the place when markets fall.”