Retirement Savings Exposed to Notable Risk During Pandemic’s Onset

The retirement savings of Americans — while initially shielded from some of the immediate economic shock stemming from the COVID-19 coronavirus pandemic’s effect on the stock market — were nonetheless exposed to considerable risk by the ensuing economic downturn that followed. While the market has showed signs of recovery in recent weeks, many of those who suffered losses were likely delayed in re-engaging with the market.

This is according to a research brief released by the Boston College Center for Retirement Research authored by researchers Anqi Chen and Nilufer Gok.

“As the COVID-19 pandemic emerged in early 2020, the stock market – as measured by the Dow Jones Wilshire 5000 – declined by 35% between its February peak and March trough,” the brief begins. “While the market has largely recovered since then, it remains very volatile and exposes household savings to continued market risk.”

During that period, the value of employer-sponsored retirement plans as well as household portfolios fell by a combined $14 trillion, with $4.4 trillion of that decline focused on 401K’s and Individual Retirement Accounts (IRAs). $1.8 trillion of the drop came from public and private defined benefit plans, while an additional $8 trillion of the drop came for household non-retirement assets.

The transition that has taken place in American retirement accounts since 1980 will also play a part in determining the ultimate severity of the exposure suffered by them in the future, according to the researchers.

“The stock market’s steep decline has great implications for the retirement assets of American households because of the shift in the nature of pension coverage and the expansion in the ownership of equities,” the researchers write.

During the 1980s, employers bore the brunt of market downturns far more than employees did due to the fact that retirement accounts were dominated by defined benefit plans. The transition in more recent decades to defined contribution plans like 401Ks and IRAs puts more of that risk solely on the employee, the researchers describe.

“Over a month-long period earlier this year, the value of equities held in retirement plans declined by $6.2 trillion before rebounding,” the researchers write. “Individuals were sheltered from the immediate impact of the $1.8 trillion of losses in defined benefit plans. But they did experience a direct hit on the $4.4 trillion of losses in 401(k)s/IRAs. As a result, a substantial portion of household financial assets were exposed in the recent market downturn.”

This led some employees into a panic, likely selling off assets at reduced prices while those with 401Ks and IRAs were left feeling vulnerable while their savings were diminished, adding to the general instability that many Americans feel in terms of retirement.

Article by Chris Clow on reversemortgagedaily.com