How Exposed Are Retirement Savings to Market Risk?

As the COVID-19 pandemic emerged in early 2020, the stock market Ð as measured by the Dow Jones Wilshire 5000 Ð declined by 35 percent between its February peak and March trough. While the market has largely recovered since then, it remains very volatile and exposes household savings to continued market risk. During the February to March period, the value of equities in employer-sponsored retirement plans and household portfolios fell by $14.2 trillion. Of that decline, $4.4 trillion occurred in 401(k)s and Individual Retirement Accounts (IRAs), $1.8 trillion in public and private defined benefit plans, and $8.0 trillion in household non-retirement assets. This brief documents where the declines occurred and the extent to which retirement accounts are exposed to equity market risk. The first section looks at overall trends in the stock market and household exposure. The second section breaks down the decline in equity values by source. And the third section focuses specifically on retirement assets. This information is interesting and important in its own right. But, as the final section concludes, the declines also highlight the fragility of our retirement plans. More than two-thirds of the drop in retirement plan equity holdings was in defined contribution plans. As defined benefit plans become rare, households increasingly bear the full brunt of market turmoil. Much of the discussion about reforming private sector retirement plans has focused on extending coverage. But the current financial downturn also underlines the need to construct arrangements where the full market risk does not fall on retirement plan participants.