Could 401K money "talk"?
March 21, 2017 8:54 AM Subscribe
Could private individuals express their pleasure/displeasure with the state of the world by moving the money inside their 401Ks/IRAs in or out of stock investments, and actually have any impact on stock prices?
Current events had me thinking about influence and politics and money and such, and this thought came into my head. Public corporations seem to listen primarily (exclusively?) to their stock price. Money can be moved between different investments while staying inside a 401K (or IRA). The mix of investments for the money being deposited each paycheck can also be changed. A lot of people have a lot of money inside retirement accounts, and a lot being automatically deposited into those accounts. So...could enough people moving their money/deposits out of stocks into non-stock investments actually have a noticeable affect on stock prices (e.g. the S&P 500 index), even while they aren't actually spending or donating anything (all funds stay in the account)?
Being a math/engineering/nerd type, now I'm interested in the math and mechanics of this (more than the politics, for now -- there's a huge, obvious rathole there regarding representation that I'd like to avoid for the purposes of answering the question). I'd be interested in comments on this from any of you more finance-knowledgeable mefites. How much money is in 401Ks/IRAs total, compared to total stock market investment? What if we include all private individual investments? Could the big funds themselves negate this kind of action by only doing it on paper, i.e. still investing roughly the same amount in stocks in actuality (like banks investing your "cash" in savings in other investments/loans)? What financial risks would there be for the individual doing this? They could lose some money by missing ups and downs in the market, but it seems like the bulk of the principal would be safe. Any other comments on what would actually happen if a significant number of people did this?
Current events had me thinking about influence and politics and money and such, and this thought came into my head. Public corporations seem to listen primarily (exclusively?) to their stock price. Money can be moved between different investments while staying inside a 401K (or IRA). The mix of investments for the money being deposited each paycheck can also be changed. A lot of people have a lot of money inside retirement accounts, and a lot being automatically deposited into those accounts. So...could enough people moving their money/deposits out of stocks into non-stock investments actually have a noticeable affect on stock prices (e.g. the S&P 500 index), even while they aren't actually spending or donating anything (all funds stay in the account)?
Being a math/engineering/nerd type, now I'm interested in the math and mechanics of this (more than the politics, for now -- there's a huge, obvious rathole there regarding representation that I'd like to avoid for the purposes of answering the question). I'd be interested in comments on this from any of you more finance-knowledgeable mefites. How much money is in 401Ks/IRAs total, compared to total stock market investment? What if we include all private individual investments? Could the big funds themselves negate this kind of action by only doing it on paper, i.e. still investing roughly the same amount in stocks in actuality (like banks investing your "cash" in savings in other investments/loans)? What financial risks would there be for the individual doing this? They could lose some money by missing ups and downs in the market, but it seems like the bulk of the principal would be safe. Any other comments on what would actually happen if a significant number of people did this?
According to this report from Vanguard, "more than 90 million Americans are covered by DC plan [defined contribution, e.g. 401k] accounts, with assets now in excess of $6.7 trillion." Not all of that money is invested in the stock market, though - some of it is in bonds, or annuities, or REITs, or various other kinds of investment vehicles... some of it is just sitting around in cash. U.S. market capitalization is around $19-20 trillion. So, 401k accounts probably do make up a noticeable percent of the market, but not, like, a majority. If *everyone* changed their investment behavior, it would probably make a noticeable difference.
However, at least in the 401k/403b accounts I've personally owned, I haven't had much control over my investments - like, there might be 5 or 10 or 20 different investments I could choose from, and I've never had the option to pick individual stocks. It's possible this is something unusual to my previous employers, but it's been true with like four different employers and three different investment providers. I could choose the "growth" mutual fund or the "guaranteed income" annuity or the "socially conscious" fund, but I didn't have very granual options.
Because of this the barriers to actually divesting are more in the hands of the administrators of the fund (whoever decides what options to offer, and what the default investment is). Also, as I said, most 401k money that is in the stock market is not invested directly in individual stocks, but rather in mutual funds (passive or active). Exxon-Mobil doesn't care that much about the S&P500 - they care about the price of XOM.
But also, to answer your last question, do not underestimate the financial risk of getting out of the stock market. If your money is not growing, it's slowly losing value due to inflation. Gains from the stock market cushion you from other kinds of losses. There are alternative investments (real estate, annuities, investing in your own business etc.) but they tend to be riskier and/or lower-return. Putting your money in a savings account earning 0.2% interest is not a solution.
posted by mskyle at 10:11 AM on March 21, 2017 [2 favorites]
However, at least in the 401k/403b accounts I've personally owned, I haven't had much control over my investments - like, there might be 5 or 10 or 20 different investments I could choose from, and I've never had the option to pick individual stocks. It's possible this is something unusual to my previous employers, but it's been true with like four different employers and three different investment providers. I could choose the "growth" mutual fund or the "guaranteed income" annuity or the "socially conscious" fund, but I didn't have very granual options.
Because of this the barriers to actually divesting are more in the hands of the administrators of the fund (whoever decides what options to offer, and what the default investment is). Also, as I said, most 401k money that is in the stock market is not invested directly in individual stocks, but rather in mutual funds (passive or active). Exxon-Mobil doesn't care that much about the S&P500 - they care about the price of XOM.
But also, to answer your last question, do not underestimate the financial risk of getting out of the stock market. If your money is not growing, it's slowly losing value due to inflation. Gains from the stock market cushion you from other kinds of losses. There are alternative investments (real estate, annuities, investing in your own business etc.) but they tend to be riskier and/or lower-return. Putting your money in a savings account earning 0.2% interest is not a solution.
posted by mskyle at 10:11 AM on March 21, 2017 [2 favorites]
The scenario doesn't make much sense.
What do your stock holdings have to do with your "displeasure with the state of the world"?
If you think the companies are somehow to blame for the state of the world - you'd rather them change course and do something different - than your way to influence them is through your ownership of their stock, and your ability to vote on directors and major policies. This is the reason companies are responsive to the desires of their largest investors more so than their share price. (When executives are focused on share price, it's usually because their major investors want a higher short term return.)
Large investors (401K providers, mutual fund companies, etc.) would try and prevent this being done on a wide-spread basis as it would reduce the liquidity of stocks (fewer buyers when they need to sell). If it was just being done in one segment of their business (say half of Vanguard funds were going to do this, but not the other half) they'd want to prevent it because it would disrupt their internal market (it would meet the needs of half their investors, but screw with the other half).
If everyone agreed to do this simultaneously, it also couldn't be done: Logically, there'd be no buyers to buy the stocks people are trying to sell off.
Lastly, if you did this, you'd be increasing your risk substantially. Mutual funds that own stock that were previously returning 7%, if they switched to money market funds or something similar, would drop to a 1% return (if you're lucky). You wouldn't have enough money to survive retirement. Pensions would go bankrupt. Insurance companies may, too - they typically need market returns to fund payouts.
And, of course, none of this would do anything to address your "displeasure with the state of the world."
posted by NotMyselfRightNow at 10:17 AM on March 21, 2017 [2 favorites]
What do your stock holdings have to do with your "displeasure with the state of the world"?
If you think the companies are somehow to blame for the state of the world - you'd rather them change course and do something different - than your way to influence them is through your ownership of their stock, and your ability to vote on directors and major policies. This is the reason companies are responsive to the desires of their largest investors more so than their share price. (When executives are focused on share price, it's usually because their major investors want a higher short term return.)
Large investors (401K providers, mutual fund companies, etc.) would try and prevent this being done on a wide-spread basis as it would reduce the liquidity of stocks (fewer buyers when they need to sell). If it was just being done in one segment of their business (say half of Vanguard funds were going to do this, but not the other half) they'd want to prevent it because it would disrupt their internal market (it would meet the needs of half their investors, but screw with the other half).
If everyone agreed to do this simultaneously, it also couldn't be done: Logically, there'd be no buyers to buy the stocks people are trying to sell off.
Lastly, if you did this, you'd be increasing your risk substantially. Mutual funds that own stock that were previously returning 7%, if they switched to money market funds or something similar, would drop to a 1% return (if you're lucky). You wouldn't have enough money to survive retirement. Pensions would go bankrupt. Insurance companies may, too - they typically need market returns to fund payouts.
And, of course, none of this would do anything to address your "displeasure with the state of the world."
posted by NotMyselfRightNow at 10:17 AM on March 21, 2017 [2 favorites]
The market value of the Wilshire 5000 is about 20 Trillion (roughly 120% of US GDP). IRAs have about 7.6TT and 401ks have about 4.7TT. Hard to tell how much is in equity vs fixed income and US vs domestic but fair to say the investments are meaningful in the context of the US market.
A couple of problems with the plan that come to mind:
1. Coordination. How are you going to get this communicated to a bunch of people all acting individually across multiple companies. Even the largest single employers can’t move the market—you need a lot of people all across the country.
2. Compliance. Best thing for any individual to do is sell early, whit for everyone else to sell and then reinvest. How could you stop that?
3. You may be talking but what are you saying? What do you expect these companies to do and will that spark reinvestment? It’s hard to have a meaningful impact on behavior unless you can clearly spell out what behavior you want to see
4. You’re going to help people you probably don’t want to. You go and sell, market crashes—it’s not going to stay down. Sovereign Wealth Funds, rich individuals overseas, etc, are going to snap up all these bargains—and they’ll be happy to sell them back to you later at a much higher price.
5. What to do with the cash. If you stay in cash, nothing much happens—rates will drop a couple of bps but nothing major. If you go into corporate bonds, however, most likely outcome is that companies will sell debt to these bond funds that now have tons of cash. The companies will take the proceeds from the bond sale and use it to buyback all the stock that you’re selling. So you have lower impact on the market and you lose money.
There are a few more that come to mind like loss of earning power, but you get the idea.
posted by limagringo at 10:19 AM on March 21, 2017 [1 favorite]
A couple of problems with the plan that come to mind:
1. Coordination. How are you going to get this communicated to a bunch of people all acting individually across multiple companies. Even the largest single employers can’t move the market—you need a lot of people all across the country.
2. Compliance. Best thing for any individual to do is sell early, whit for everyone else to sell and then reinvest. How could you stop that?
3. You may be talking but what are you saying? What do you expect these companies to do and will that spark reinvestment? It’s hard to have a meaningful impact on behavior unless you can clearly spell out what behavior you want to see
4. You’re going to help people you probably don’t want to. You go and sell, market crashes—it’s not going to stay down. Sovereign Wealth Funds, rich individuals overseas, etc, are going to snap up all these bargains—and they’ll be happy to sell them back to you later at a much higher price.
5. What to do with the cash. If you stay in cash, nothing much happens—rates will drop a couple of bps but nothing major. If you go into corporate bonds, however, most likely outcome is that companies will sell debt to these bond funds that now have tons of cash. The companies will take the proceeds from the bond sale and use it to buyback all the stock that you’re selling. So you have lower impact on the market and you lose money.
There are a few more that come to mind like loss of earning power, but you get the idea.
posted by limagringo at 10:19 AM on March 21, 2017 [1 favorite]
I think the main problem here has to do with the nature of indexing.
If you're a person of average to decent means and you have any damn sense at all, most, if not all, your stock market investments are in whatever index funds are available to you. Indexes, by definition, track the market (they attempt to make their holdings proportional to the market). They are a passive form of investing. In order to implement your plan, you would have to give that up completely.
That said, there are "socially conscious"/"responsible" funds of various kinds and respectabilities that are available to you, should you wish to do this with your own money.
If you think the companies are somehow to blame for the state of the world - you'd rather them change course and do something different - than your way to influence them is through your ownership of their stock, and your ability to vote on directors and major policies.
Nothing like a little humor at lunch, though!
posted by praemunire at 10:28 AM on March 21, 2017
If you're a person of average to decent means and you have any damn sense at all, most, if not all, your stock market investments are in whatever index funds are available to you. Indexes, by definition, track the market (they attempt to make their holdings proportional to the market). They are a passive form of investing. In order to implement your plan, you would have to give that up completely.
That said, there are "socially conscious"/"responsible" funds of various kinds and respectabilities that are available to you, should you wish to do this with your own money.
If you think the companies are somehow to blame for the state of the world - you'd rather them change course and do something different - than your way to influence them is through your ownership of their stock, and your ability to vote on directors and major policies.
Nothing like a little humor at lunch, though!
posted by praemunire at 10:28 AM on March 21, 2017
What you're talking about is called divestment, and a lot of pension funds, etc, engage in it.
You'd be better off focusing on particular companies that you're upset with rather than the market as a whole, though. And organizing with people who are similarly upset with them.
posted by empath at 11:07 AM on March 21, 2017 [1 favorite]
You'd be better off focusing on particular companies that you're upset with rather than the market as a whole, though. And organizing with people who are similarly upset with them.
posted by empath at 11:07 AM on March 21, 2017 [1 favorite]
Could private individuals express their pleasure/displeasure with the state of the world by moving the money inside their 401Ks/IRAs in or out of stock investments, and actually have any impact on stock prices?
These people certainly think so.
posted by flabdablet at 11:51 AM on March 21, 2017
These people certainly think so.
posted by flabdablet at 11:51 AM on March 21, 2017
That said, there are "socially conscious"/"responsible" funds of various kinds and respectabilities that are available to you, should you wish to do this with your own money.
That won't be offered in many 401ks at all, due to government regulation. Under ERISA, a 401k administrator is creating liability for itself by offering a fund that may sacrifice return.
posted by jpe at 4:01 PM on March 21, 2017
That won't be offered in many 401ks at all, due to government regulation. Under ERISA, a 401k administrator is creating liability for itself by offering a fund that may sacrifice return.
posted by jpe at 4:01 PM on March 21, 2017
That's not true.
Right. Not only is it not true, the Labor Department issued a ruling in October 2015 specifically saying that socially responsible funds could be offered in 401k plans as long as they meet the same criteria as any investment under fiduciary rules. This overrides previous guidance from 2008 which said that socially responsible funds should be "rare."
posted by JackFlash at 4:30 PM on March 21, 2017
Right. Not only is it not true, the Labor Department issued a ruling in October 2015 specifically saying that socially responsible funds could be offered in 401k plans as long as they meet the same criteria as any investment under fiduciary rules. This overrides previous guidance from 2008 which said that socially responsible funds should be "rare."
posted by JackFlash at 4:30 PM on March 21, 2017
That just means they're not a per se breach of fiduciary duty. Having them exposes the administrator to liabiity regardless.
posted by jpe at 4:40 PM on March 21, 2017
posted by jpe at 4:40 PM on March 21, 2017
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