The impact of COVID-19 on the markets and 401(k) balances as of September

In all, returns in recent months were an extension of the trends that began late in the first quarter: impressive equity gains, coupled with steady performance by high-quality, U.S. fixed income. These conditions generally supported diversified target-date fund (TDF) performance and 401(k) account balances.

_{Source as of September 30, 2020. The S&P 500 Index tracks the performance of 500 large publicly traded companies in the United States. The MSCI, Europe, Australia, and Far East (EAFE) Index tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. The MSCI Emerging Markets Index tracks the performance of publicly traded large-and small-cap emerging stocks. The Bloomberg Barclays U.S. Aggregate Bond Index tracks the performance of U.S. investment-grade bonds in government, asset-backed, and corporate debt markets. It is not possible to invest directly in an index. Past performance does not guarantee future results.}

Large U.S. companies gained nearly 9% in the third quarter, improving the S&P 500 Index’s returns to 5.7%, year to date. Midsize and smaller capitalization company stock prices also climbed during the quarter, although less impressively than large-cap stock prices.

Developed foreign market companies advanced approximately 4.9% in the third quarter, helping the MSCI EAFE Index cut its 2020 losses to 6.7%. Emerging markets equity returns also bounced, rising 10% in the third quarter and wiping out the year’s losses.  

High-quality corporate and government fixed-income security performance was muted during the third quarter, and the Bloomberg Barclays U.S. Aggregate Bond Index has returned about 6.8%, year to date. 

Continued equity gains boosted longer-dated TDF performance, while shorter-dated TDFs were supported by steady fixed-income returns. 

_{Source as of September 30, 2020. S&P target-date indexes aim to measure the performance of multi-asset portfolios that correspond to particular target retirement dates. Each index provides varying levels of exposure to equities and fixed income, and each target-date allocation is created and retired according to a predetermined schedule related to the respective target date. It is not possible to invest directly in an index. Past performance does not guarantee future results.}

Longer-dated TDFs benefitted from spiking stocks—The S&P Target Date 2060+ index, which is invested mostly in U.S. and foreign equities, rose approximately 6.6% in the third quarter. This boosted its year-to-date return to about negative 0.5%. The equity-heavy S&P Target Date 2040-2055 indexes performed similarly.  

More balanced TDFs delivered returns between stocks and bonds—The S&P Target Date 2020, 2025, and 2030 indexes returned approximately +3.7%, +4.4%, and +5%, respectively, during the quarter—improving their year-to-date returns. 

Shorter-dated TDF gains have been more modest—The S&P Target Date 2010 and 2015 indexes, which are heavily weighted toward fixed income, added approximately 3.3% and 3.6% in the third quarter, respectively, about the same as their year-to-date performance. 

With so much happening in the markets—and in the lives of our 401(k) participants—it’s important to understand which actions people are taking inside their retirement plans. When downside volatility spiked in the first quarter, we launched a widespread campaign to educate our participants on how to weather changing market conditions. And in spite of all the related economic turmoil, we’re happy to say very few people made drastic changes to their investments, with 401(k) balances increasing during the second and third quarters. This growth was helped by the fact that very few participants lowered their contributions. 

We’re pleased that our participants, across all age groups, were able to take advantage of the strong equity and steady fixed income returns during the second and third quarters by rebalancing their investments. Generally, we found that participants who transferred money within their 401(k)s moved to less aggressive investments in September 2020 as compared with September 2019. 

Compared with September 2019, out of those participants who made transfers in September 2020:

• Fewer participants moved money from relatively conservative investments (stable value and fixed income) and into the market or diversified funds.
• More participants moved money to conservative investments (stable value and fixed income).
• About the same proportion remained invested in a diversified mix or in equities.

Our evidence suggests that the shift to safety was more prevalent among older participants, who were more likely to move money to conservative investments than younger ones. 

Stock markets have staged an impressive rally off their March lows—large U.S. companies have never been worth more. In response, we upped our education game, and we’re encouraged that most participants stayed the course—and that those who shifted to a more conservative strategy didn’t do so at the market’s bottom, and may have done so for personal, strategic reasons.  

We expect the economic turmoil resulting from the pandemic to linger, causing uncertainty for participants in their personal finances and their retirement accounts. As you meet—virtually, for now—with participants, it’s a good idea to reinforce the importance of the basics, from budgeting and emergency savings to staying true to long-term goals.