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Q4 Market Roller Coaster Reveals Retirement Planning Pitfalls
401(k) investors are passive - except when they're not
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Happy Sunday, and welcome to Benzinga’s financial advisor newsletter of 2025!
Today, we’re looking at what the volatile markets of the last three months of 2024 reveal about 401(k) investors - and the lessons advisors can draw from that.
So, let’s get to it!
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INDUSTRY CHATTER
The roller coaster markets of the last quarter of 2024 hold some important lessons for how advisors should approach retirement planning with their clients.
While last November's election sent the markets on a rally, with the S&P 500 ending up 5.9% that month, the same index fell 2.4% the following month, as the much-vaunted Santa Claus Rally failed to appear and Federal Reserve Chairman Jerome Powell signaled slower rate cuts in the future.
401(k) Investors Trade Lightly - With A Couple Of Exceptions
But despite this turmoil, American investors were very restrained. Data from the Alight 401(k) Index shows that on average only 0.011% of 401(k) balances were traded daily in December. Only two of the month's 21 trading days showed big spikes in trading activity, including December 18, when Powell warned that rate cuts will be slower in 2025 and 401(k) trading activity jumped five times over.
For advisors, this shows that most prefer a one-and-done approach to retirement investing that they can decide on once, and then never touch. The enduring popularity of target date funds shows as much, though Alight’s Rob Austing points out that target date funds also had the most withdrawals in December. This suggests that on those really volatile days, such as December 18, investors can see even target date funds as being too risky.
It's important, then, that advisors work with clients to select target date funds with a date and risk profile that really suits the client, so they feel confident sticking with it through thick and thin.
Retirement Investors May Be Forgoing Diversification
Another lesson is that even hands-off clients, even during largely hands-off markets, may well look for changes during big market events. Advisors need to be prepared, with plans for how to respond, and with adjustments and reviews to reassure and readjust.
According to Alight, on 14 of December's 21 trading days, equity funds were the most traded in 401(k) accounts. This suggests that retirement investors may be overexposed to equities, forgoing the benefits of diversification. Recent stock market performance makes this understandable, but advisors should be ready to advise clients on the risks of forgoing diversification.
MARKET RECAP
Wall Street wiped out its entire post-election rally this week as mounting interest-rate fears were stoked by a red-hot labor market, surging inflation expectations and escalating geopolitical tensions ahead of Donald Trump‘s return to the White House.
In a shortened trading week due to Thursday’s funeral for former President Jimmy Carter, market activity reached a fever pitch on Friday.
The U.S. economy boasted an impressive 256,000 nonfarm payrolls in December — a figure that made the consensus economist forecast of 160,000 jobs pale in comparison. This marked the strongest employment growth since March. Additionally, the unemployment rate dropped to 4.1%, beating forecasts of 4.2%.
In simple terms, the U.S. labor market ended 2024 firing on all cylinders. While this robust performance bodes well for consumer spending, it poses a significant challenge for the Federal Reserve, which now faces mounting pressure to keep inflation in check.
Expectations for a new interest rate cut were further pushed down the road to September 2025 in reactions to new economic developments. For stocks, this represented a setback, as indices tumbled across the board.
Earlier in the week, President-elect Trump, in a one-hour speech at Mar-a-Lago, floated provocative ideas, including annexing Canada as a 51st state, imposing stringent tariffs on Mexico and demanding NATO members increase military spending to 5% of GDP.
On Friday, the Biden administration announced new sanctions targeting Russian oil giants Gazprom Neft and Surgutneftegas, shadow fleet vessels and opaque traders. These measures triggered a sharp rise in oil prices, further unsettling markets.
Inflation Fears Surge
Consumer inflation expectations for the next five years reached 3.3% in January 2025, hitting their highest levels since June 2008, according to a University of Michigan survey. Rising inflation anxiety may reflect concerns over the incoming Trump administration’s planned tariff hikes.
Wildfires Impact Insurers
California wildfires destroyed over 10,000 structures, intensifying pressure on property insurers like Allstate Corp. (ALL) and Travelers Companies (TRV). Economic losses could reach $57 billion, with insurance stocks under market focus.
Rate Hike Panic
The blowout December jobs report forced Bank of America Securities to scrap expectations for further interest-rate cuts. It marks a notable U-turn from a top investment bank. Economist Aditya Bhave floated the risk of rising discussions towards interest rate cuts, should core inflation surges above 3% again.
THE WEEK AHEAD
Economic Data
Monday: US consumer inflation expectations for December
Tuesday: US PPI numbers for December
Wednesday: US CPI (inflation) numbers for December
Thursday: US retail sales for December and initial jobless claims
Friday: US December housing starts and preliminary building permits
Earnings
Click here for the full calendar of economic data and earnings reports.
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