‘Retirement’ has been a tricky if not elusive term for American workers over the last few decades — an investment rollercoaster ride that has brought us right up to the present year of pandemic and political uncertainty.
Consider that by 1983, nearly half of all large U.S. companies offered 401(k) plans while simultaneously closing and freezing their pension plans. Today, pensions — defined benefit plans — are an endangered species, almost extinct, reserved mostly as a public sector benefit. In their place, the 401(k), which puts the burden of making management decisions largely on the individual, has since emerged as the go-to, defined contribution retirement vehicle for the American worker.
At the best of times, this is like giving a Formula One racecar to an average driver and expecting him or her to navigate a sophisticated track with hair-raising bends and unexpected roadblocks. The task of pension management requires a high level of specialization reserved for the far better equipped world of institutional investors. Without that skill and experience, individuals can easily get crushed at every bump or bend in the road.
Case in point: fast forward to 35 years later, the 2008 crash turned 401(k)s seemingly into 201(k)s. Americans lost an estimated $2.4 trillion from their retirement accounts in the last half of 2008 — a 25% plunge, on average, for workers who had been on the job for 20 years.
With COVID-19, we’ve seen the ugly underside of this reality manifest particularly with younger workers, as many found themselves without a job, let alone the ability to keep funding their retirement plans, if they had one in the first place. Even our divided congress came together to pass the CARES act that allowed people to tap into their 401(k) for the likely unforeseen circumstance of having to use it to pay rent and bills. It’s worth considering if, in fact, 401(k) plans are doubling as “rainy day” funds, how important it is to put measures in place to protect them from losing significant mass during economic downturns.
Bringing actual data to the present, as of the end of March 2020, 401(k) assets made up nearly $5.6 trillion in assets,19% of the $28.7 trillion in U.S. retirement assets. Stunningly, by the second quarter of 2020, knowing what we know about pandemic job losses during that period, these figures actually went up by 11%, with 401(k) assets totaling close to $6.3 trillion. How is this possible? A rollercoaster market, that’s how. And we all know that built into the steep climbs rollercoasters make, there’s usually a terrifying plunge on the other side of that peak.