Trump administration officials made the rounds this weekend to try to answer the nearly unanswerable: Why tank the stock market by starting a trade war? And are you subtracting trillions of dollars in unrealized losses out of people’s savings on purpose?
Treasury Secretary Scott Bessent’s appearance on NBC’s “Meet the Press” was particularly odd.
“Most Americans in a 401(k) have what’s called a 60/40 account,” he said, without explaining what he was talking about. These accounts, he added, “are down 5, 6 percent on the year.”
Most Americans in a 401(k) do not have a 60/40 account. By saying so, Mr. Bessent understates the risk in people’s portfolios, the fear they feel and how being frightened can affect their retirement security if they sell while scared.
Let’s take this apart a bit.
A 60/40 fund, for most people in workplace retirement accounts, is a mutual fund that contains 60 percent stocks and 40 percent bonds or other investments that tend not to be as volatile as stocks. Often, funds like these have a target date for a year close to when a person intends to retire.
That 60 percent in stocks may not be all U.S. equities, which is important because many markets outside the United States have done much better this year. And Mr. Bessent is right that these funds are doing better than the overall U.S. stock market this year, which is down around 13 percent.
But while many 401(k) investors do put money in funds with a mix of asset types, this is not the correct way to take the temperature of the nation’s retirement investments.
According to data on millions of 401(k) plan participants collected by the Employee Benefit Research Institute and the Investment Company Institute, 68 percent of participants put money in target-date funds as of the end 2022. But only a small fraction of those funds maintain a 60/40 balance like those that Mr. Bessent mentioned, since each fund on offer at any given employer has a different stock allocation. The stock percentage ratchets down over time to decrease risk as you approach retirement, so younger people are likely to have much more than 60 percent stocks in any given target-date fund.
According to the Investment Company Institute, just 41 percent of 401(k) balances (the actual dollars at stake) were in hybrid funds like target-date ones at the end of last year. And at the end of 2022, 71 percent of all 401(k) assets were in stocks.
The Treasury Department did not respond to a request for comment.
Mr. Bessent is in his 60s and wealthy, and when you write or talk about personal finance, it’s easy to fall into the trap of anchoring to your own stage and place in life.
Most employers are good about nudging investors into balanced funds, but plenty of people lack that assistance because they don’t have a workplace retirement plan. Instead, they’re on their own, either because their employer has no savings vehicle or because they work for themselves. Mr. Bessent now has access to a federal employee workplace retirement plan that is one of the best such plans in existence, and it’s chockablock with low-cost target-date funds.
And while Mr. Bessent may himself have only 60 percent of his money in stocks, younger, less experienced 401(k) investors in their 20s and 30s had close to 90 percent of their investments in stocks at the end of 2022.
That kind of sky-high stock exposure means more volatility at a time like this. More volatility raises the possibility of getting frightened and selling all your stocks, particularly if you don’t have 40 years of experience watching your retirement account balance spike and plunge. And fear-based selling could mean missing out on future gains if you don’t start buying stocks again at the right moment.
Also, big stock market declines can scare young people away from investing in the first place. Not starting early costs people a lot of money over time, since you miss out on the opportunity to let your portfolio ride over decades.
Those 60/40 funds turn out to be a very good thing. My colleague Jeff Sommer regularly points to the merits of a balanced approach to investing. Most of us should allocate our retirement savings this way.
But when Mr. Bessent make those funds into some kind of supposedly reassuring touchstone, it ignores the sheer terror of a moment like this and the real pain of stock market declines.