FOR as long as 401(k) accounts have been around, investors have generally stuffed them with stocks, while bond and cash holdings have been relatively sparse.
Yet for the first time since Hewitt Associates began tracking 401(k) accounts in 1997, American workers in February held less than half of their 401(k) money in stocks.
Instead, most of their nest eggs now sit in fixed-income and cash instruments, including stable-value, bond and money market funds, according to Hewitt, the employee benefits consulting firm. The proportion of 401(k) money in stocks fell to slightly less than 48 percent in February, down from 53 percent at the start of the year and 69 percent in 2007.
The shift reflects the shocking stock market losses that began in 2007 and continued at the start of this year. “People don’t want to be owners anymore; they want to be loaners,” said Mike Scarborough, president of Scarborough Capital Management, an investmentadvisory business in Annapolis, Md., that specializes in 401(k) clients.
Professional money managers have also begun to favor fixed-income holdings, according to a separate report released last month by Russell Investments. It showed that the professionals were more bullish about corporate investment-grade and high-yield bondsthan about domestic or foreign equities.
Could these reports be signaling that the bulk of investors have finally thrown in the towel on stocks? There’s an old saw on Wall Street that a new bull market can’t begin until most investors “capitulate,” the market hits bottom, and the smart money then starts bidding stocks higher again.
The evidence, however, isn’t entirely clear.
Many investors are certainly making their portfolios more conservative. For example, a vast majority — 78 percent — of the 401(k) assets that were removed from stocks in February went into guaranteed investment contracts or stable-value funds, which invest in bonds and bondlike instruments that are insured against losses by an insurance company.
Only about a third of 401(k) plans offer cash-like investment options such as money market funds, so “stable value is the most conservative asset class in about two-thirds of plans,” said Pamela M. Hess, Hewitt’s director of retirement research.
But Ms. Hess noted that while workers have been shifting more money than usual in their 401(k)’s, the total that was moved in February still amounts to just 6 percent of all assets in the plans.
And 57 percent of new contributions being made into these retirement accounts are still being directed into stocks. Though that’s down from 68 percent a year ago, it’s still a majority. “Employee sentiment doesn’t seem to be as bad as their asset allocation would lead you to believe,” Ms. Hess said.
So how can one explain the overall drop in stock exposure?
In a word, inertia. As most investors left their accounts untouched, and as the Standard & Poor’s 500 index of blue-chip stocks tumbled more than 18 percent in the first two months of the year (after falling more than 38 percent in 2008), the equity stake in these accounts contracted with the market.
By not routinely rebalancing their portfolios — resetting them back to a desired mix of stocks and bonds at least once a year — investors are setting themselves up for failure, Mr. Scarborough said. “People are making short-term decisions with very long-term money,” he said.
“In all probability, the only time they’re going to feel comfortable moving that money back into equities is going to be at the wrong time, after it’s too late.”
Indeed, Mr. Scarborough noted that equity balances in 401(k)’s fell to less than 50 percent at the end of February. Since then, though, the S.& P. 500 has surged nearly 15 percent.
As far as professional investors go, the evidence is ambiguous. While the Russell survey found that more than two-thirds of money managers were bullish on corporate bonds, it also showed that 76 percent were bearish on Treasury bonds.
“While the attraction to bonds last year was all about safety, what we’re seeing now is about seeking returns,” said Erik Ristuben, Russell’s chief investment officer for North America.
He notes that money managers are trying to take advantage of immense pessimism in the bond market — pessimism that has driven down corporate bond prices to a level that implies that the economy is as bad as it was in the Great Depression.
“What is it that Warren Buffett says — be fearful when others are greedy and greedy when others are fearful?” Well that’s what investors are doing when it comes to corporate bonds, Mr. Ristuben said.
That’s great news for the debt market and corporate bonds. Unfortunately, the equity market hasn’t experienced this same level of fear and capitulation.
