401(k) investors are fleeing US stocks, target-date funds and putting their money in these 3 places. Should you follow the crowd?

Where 401(k) investors are moving their money

According to the latest Alight 401(k) Index, the flows were unmistakable. Outflows were primarily from U.S. large-cap stock funds and target-date retirement funds, typically the backbone of long-term portfolios. Meanwhile, inflows mainly surged into stable value funds, bond funds, and money market funds.

Stable value funds were the biggest winners, pulling in about 40% of the month’s trading inflows. Offered only in retirement plans, these funds contain high-quality short- to intermediate-term bonds and are designed with insurance wrap contracts to protect both principal and accumulated interest. This means upon withdrawal participants are guaranteed both even if the bonds in the fund declined in value.

It's essentially the financial equivalent of crawling under the covers during a thunderstorm. “It can be a good risk mitigator if you have already built your nest egg and you’re trying to maintain it,” said Jania Stout, president of Prime Capital Retirement & Wellness, to CNBC about these assets.

Younger investors are new to giant market swings and might panic, causing higher trading activity, Alight analyst Rob Austin told the National Association of Plan Advisors. “It’s the first time they see their 401(k)s decline. They pull it out to put it into something safe. Unfortunately, though, they did it now when stocks have already gone down, which is what we typically see. People don’t get back into equities until after they’ve rebounded. So, it’s buying high and selling low. That’s really what’s happening.”

It’s easy to see why. After years of steady gains, recent market shakiness can be alarming. Retirement accounts that once seemed untouchable are suddenly shrinking, and the idea of “waiting it out” feels a lot harder when it’s your future on the line.

But in the rush for safety, many investors risk making a classic mistake: reacting emotionally and moving money to low-risk fixed income assets instead of thinking strategically.

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The hidden risks of abandoning stocks

When markets get rocky, the gut reaction is simple: Get out before things get worse. But history is pretty clear about the risks of trying to time the market.

Investors who flee stocks during downturns don’t just miss the worst days. They also often miss the best recovery days, those sudden rebounds that recoup losses and build long-term wealth. And missing even a few of those key days can kneecap your returns for years, if not decades.

Consider this: If you missed the 10 best days in the market over the 20 years from Jan. 3, 2005 to Dec. 31, 2024, your returns would have been almost cut in half compared to a fully invested portfolio, according to J.P. Morgan Asset Management data cited by CNBC.

Timing the market requires being right twice: once when you sell and once when you buy back in. And very few investors, professional or amateur, manage to pull it off consistently.

Stable value funds have their place, especially for investors who are near retirement and can’t afford major losses. But for anyone with more than five years until retirement, pulling too much out of stocks can actually increase the risk that you’ll run out of money later on.

“Don’t be fooled by investment risk and not consider inflation risk,” Austin said to CNBC. “You might not see your account value go down, but inflation continues to be high: Will you outpace that enough to keep your portfolio growing?”

Stocks, despite their volatility, have historically been the best way to outpace inflation and grow wealth over long periods. Giving up that growth potential too soon could mean smaller retirement income, fewer lifestyle choices, and a much harder road ahead.

A popular rule of thumb says you should subtract your age from 110 to know how much of your portfolio should be in equities. Speak to your financial advisor about the right asset allocation for your age and financial goals.