One reason the L Funds were introduced was that many TSP investors tended to sell stock holdings during down markets and not move the money back into those holdings until after a recovery was well under way - locking in losses. Image: C Z/Shutterstock.com
By: FEDweek StaffRetirement savers tend to have a too-negative attitude toward the potential risks and returns of investing in stocks and stock funds but they also tend to have more money in the stock market than their target percentages, a study has found.
Data on investment patterns show that “desired allocation to risky assets tends to be lower than actual holdings. The low level of desired holdings is consistent with households’ overly pessimistic views of stock returns, and the higher level of actual holdings likely reflects the default allocations in 401(k) plans – namely target date funds,” said the Center for Retirement Research at Boston College.
“In short, people seem to be holding more equities than they want, but that pattern is probably good for them,” the study said.
It said for example that in a survey, far more retirees and near-retirees said they expected future stock market returns to be below historic averages—27 and 28 percent, respectively—than expected returns to be above historic averages—13 and 12 percent, respectively. In both cases, 36 percent meanwhile said they expected returns to be about on the historic averages while 24 percent said they had “no guess.”
It meanwhile cited surveys of retirement investors finding that the mean—where half are above and half below—desired share of stocks as a percentage of investable assets is 37 percent, the actual percentage in 2020 as calculated by one was 48 percent, and the actual in 2022 as calculated by another was 43 percent.
“One likely reason for the difference between desired and actual allocations are the defaults embedded in the retirement system – namely, target date funds,” it said.
Those funds set allocations of stock vs. fixed-income investments based on a ratio calculated as appropriate for the investor’s age—maintaining that ratio over the short term regardless of the performance of the markets while becoming slightly more conservative over time.
In the federal TSP program, one reason such funds were introduced was that many investors tended to sell stock holdings during down markets and not move the money back into those holdings until after a recovery was well under way—selling low and buying high, the opposite of desired investor behavior.
The TSP lifecycle L fund appropriate for the person’s age has been the default investment for newly hired federal employees for some 20 years and while they may change at any time, in practice many don’t. Among account holders, 40 percent now have all of their money in one or more L funds and another 15 percent have at least some of their money in one or more of the funds.
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