Many people that have “regular paying” jobs, IE - not in the gig economy, put a percentage of their paychecks into company sponsored 401K accounts with each pay period. I think it’s a reasonable assumption that a substantial portion of these go into stock purchases, primarily in the form of mutual funds. Many, if not most are tied to index funds. Does the size or volume of these purchases have any affect on the market or are they just a rounding error?
If they are significant, how can the market ever go down? There will always be new money injected that buys into the indexed funds, which turn around and buy the underlying assets.
I understand that people can and do change their elections, but for the most part, it seems to be “Set it and forget it.”
As one gets older the investment mix tends to move from stock-heavy to bond-heavy, when that is done stocks are being sold and bonds purchased (usually through funds). Also as people take distributions assets in the account are liquidated, which likely also results in both stocks and bonds being sold.
The entire point of 401(k) plans was to force workers to put their money into the stock and bond markets, with the incidental benefit of relieving employers from having to be responsible for covering shortfalls in pension fund payouts. You can argue whether this is better or worse (compared to retirees left destitute by the bankruptcy of a mismanaged or defrauded pension fund) but it certainly wasn’t promoted with the advantage to employees in mind.
Don’t forget that although all the workers with “good jobs” are paying into IRAs and/or 401ks, there’s also a hell of a lot of retirees drawing money out of their 401ks and IRAs and spending that money on their living expenses. (raises hand).
In the early days of both the programs (the 1980s), it was substantially all saving / investing and negligible withdrawing / disinvesting. Nowadays the two sides of the equation are much more balanced.
I’m too lazy to dig up statistics, but in terms of stockmarket impact, what matters is the net of the two. It’s also worth mentioning that to the degree people move IRA/401K money away from stocks towards bonds during their lifetime, that impacts both the stock market, and the bond market. So a complete analysis of IRA/401K impact would need to look at transfers between both markets, and worker savings and retiree withdrawals.
Is the question really what percent of the stock market (NYSE or NASDAQ ) consists of shares that can be linked to 401k contributions or how much do those contributions influence the market?
Another way to look at it is shifting from pensions to 401ks forces companies to fund employee retirement out of the company’s equity (or debt) instead of incurring large amounts of liabilities to fund their retirement. So rather than having tons of cash just sitting around funding pensions, it can be used to grow the company.
In theory, that is true. In reality, in the last twenty-odd years most companies that find a surplus of cash on hand have been engaging on stock buybacks to inflate their own stock price, which benefits major shareholders (i.e. the board of directors, C-suite execs looking to cash out soon, and other influential investors) rather than employees with unvested stock options in their portfolios or the long term health of the company. Boeing, for instance, has been engaging in massive stock buybacks such as this US$20B buyback in 2018.. Of course, employees can (and should) diversify their 401(k) portfolio and not hold more than a small amount of individual corporate stock, but the reality is that many companies used to offer incentives to invest in their own stock, and most people are not sophisticated financial investors.
One of the major problems with corporate pension funds was that with relaxed oversight financial officers often used pension funds essentially as collateral for debt, leveraging the hell out of the fund and leaving it vulnerable. When regulatory oversight (e.g. the Employee Retirement Income Security Act (ERISA)) increased, pensions were no longer financially beneficial to corporations, and paying a paltry percentage of salary matching into individual employee 401(k) was just factored in as an extension of salary, removing the liability of having to cope with maintaining business downturns and market variability.
Practically speaking, corporate pension funds are not generally viable; they are essentially a pyramid scheme that assumes that there are more people paying in for a longer average period than get paid out, and with greater “efficiencies” (i.e. fewer people doing more of the work), a general trend of people moving from company to company or being RIF’d instead of remaining at the same job for decades, and retirees living longer and more active lives, it is very easy for pensions to end upside down, particularly as we are experiencing demographic contraction. Boeing is certainly not going to (and at this point is likely financially incapable of) reconstituting a viable pension fund, and if this is a line in the sand for the IAMAW then the strike is likely to continue indefinitely.
This has been a huge change on the stock market over the past two decades, especially with the shift from defined benefit plans to defined contribution plans. No matter what the economy is doing, every two weeks, new money is being put into the stock market as payroll withholdings are contributed. It is also a big reason for such a sustained bull market from 2010 through 2020, longest run of a bull market.
I expect the phenomona to continue generally as a trend.
Early in my working life I was concerned that being a younger Boomer I’d be stuck behind age related shifts: shifting from less equity heavy behind the curve. The market has not behaved consistent with that. Are older Boomers staying equity heavy or do other factors swamp it?
I don’t know about other Boomers but this older Boomer is staying equity heavy because I also have a defined benefit pension plan that I can rely on during bear markets. As these plans get phased out, maybe we’ll see the expected shift to more conservative asset mixes.
This youngish boomer (age 66) is staying equity heavy because I don’t have a defined benefit pension and I expect to live 20-30 years so I need my real (IOW inflation-corrected) returns to be meaningfully positive over the long haul. Which a bond-heavy portfolio does not deliver.
As a bear market hedge I do have enough bonds to cash out and live off of for a couple years living large or more years living cheap. So won’t need to sell equities into a declining or crashing market. At least not right away.
These are individual decisions, and I am doing similarly, but my comment was about the impact of the expected mass of those individual decisions on the market in aggregate. Do we represent what most Boomers have been doing? Or did the majority of Boomers follow standard models and switch to more bond heavy portfolios as they aged? If that then why solid my fear not pan out?
My guess is simply that there is new money coming in from international sources and from the 0.1%.
401k analysts (Fidelity etc.) say that the majority of participants set their initial purchase allocation and never rebalance or modify their new investment allocations over their lifetime.
A good % of participants abandon their accounts when they change jobs.
Like anything involving wealth in this country I suspect a huge percentage of all 401k accounts have a trivial amount of money in each that doesn’t add up to much of the total value in all 401Ks.
IOW, (total WAG) 10% of the 401k accounts represent 80% of the total 401k dollars. The other 90% of accounts represent the last 20% of the total dollars.