Despite recession fears, most investors haven't transferred 401(k) assets

Despite recession fears, most investors haven’t transferred 401(k) assets

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Many investors fear a recession amid high interest rates, high inflation and stock market volatility. But the majority haven’t changed their investment portfolios, according to research by Fidelity Investments.

The report found that only 5% of 401(k) and 403(b) investors transferred asset allocations during the second quarter of 2022, just below the 5.3% who made changes in the previous quarter.

The results showed that among savers who made adjustments, the majority of investors made only one, and the biggest change involved switching to more conservative assets.

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Not surprisingly, given that many 401(k) investors use so-called target date funds, a “set it and forget” option that automatically and progressively changes the investor’s allocation to more conservative assets as they approach retirement. These changes are not part of the indicated 5% Fidelity, as the adjustments are made by the Fund.

In fact, 95% of 401(k) plans offered money for the target dates in 2021, according to Vanguard, and 81% of participants used that money.

However, if you want your portfolio to reflect concerns about the economy, here are some options to consider.

Consider switching to commodities

While there may be limited options to hedge inflation in a 401(k) plan, investors may have more options in other accounts, said certified financial planner Bill Brancacchio, co-owner of Rightirement Wealth Partners in Harrison, New York.

His company began shifting clients’ portfolios last summer, anticipating higher inflation with potentially higher interest rates. “You have to make changes before the train leaves the station,” he said.

If we have persistent inflation, commodities are a good way to hedge against that.

Bill Brancaccio

Co-owner of Rightirement Wealth Partners

A “broad basket of commodities,” including energy, materials and metals, typically 3% to 10% of the total portfolio, was a good addition, he said.

“If we have persistent inflation, commodities are a really good hedge against that,” he added, noting that assets might also do well with higher interest rates.

How to set your bond allocations

CFP Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Mich., said that while many advisors have built portfolios to resist volatility, investors operating themselves may still have room for improvement.

For example, you’ll want to think about the so-called term of your bond, which measures sensitivity to interest rate changes. Expressed in years, the factors of the term in the coupon, the time to maturity and the return paid during the term.

“You want to make sure your bond life is shorter,” Watson said, “because when interest rates go up, you can reinvest the proceeds sooner to earn more.”

And you’ll need to make sure you have “high-quality bond exposure,” including so-called investment grade bonds, he said, which are generally less risky because the issuer is less likely to default.

While market interest rates and bond prices move in opposite directions — with higher rates leading to lower values ​​– these assets still play a key role in portfolio diversification during long recessions, Brancacchio said.

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