The government can’t shutdown your 401(k)
On September 30, Congress will hit its deadline to fund the federal government. For the fiscal year 2024. The deep political divisions in Congress may prevent meeting the deadline.
While we’ve known this has been in the cards for some time, the probability gets higher each day. So, let’s do a short nonpolitical Q&A on a potential shutdown. And then how it may affect your 401(k).
Q: What is a government shutdown?
Whenever Congress authorizes a law, the government must spend money to enact it. But sometimes, the authorization doesn’t contain provisions to fund the law. A second piece of legislation, known as an appropriations bill, is required. This is where Congress appropriates money for the new law.
These appropriations must be renewed – usually every year – for the law to remain funded. This is discretionary spending. Congress decides upon its own discretion whether to continue funding the law.
As of this writing, Congress has not currently passed any appropriation bills. (To be more precise, the Senate has passed all twelve, but the House has passed none. As you know, both branches must sign off on a bill before it becomes law.)
When this happens, Congress will usually pass what’s known as a continuing resolution. This is a temporary spending bill that funds the government until a specified date. It’s a way for Congress to buy itself more time.
Some members of the House have been vocal about disliking continuing resolutions. The House may not pass any of the bills or continuing resolutions. Then much of the government will shut down on October 1.
Q: What happens during a shutdown?
Federal agencies must halt all their non-essential functions. This means that many federal employees will not show up for work. This can lead to delays in many government services.
Some non-essential services are too vital to ever stop operating. Think air traffic control. Law enforcement. Forest Service firefighting. Much of the national Weather Service.
Some government operations fall under the umbrella of mandatory spending. These are for certain laws and programs that are not required to renew each year. Think Social Security benefits, Medicare, and Medicaid. These programs will continue operating during a shutdown.
But many of the federal employees who oversee these programs will be sent home. As a result, there may be delays in helping citizens who need to interact with these services in some way.
Sometimes, Congress may pass some appropriations bills, but not all. This leads to a partial shutdown. When this happens, agencies that have been funded remain open. While those that have not closed up shop.
Q: How long do shutdowns last?
It’s impossible to know, but they don’t last long. Many shutdowns, in fact, only last for a day or two. But sometimes, shutdowns can drag on for weeks.
In 2013, for example, we experienced a 16-day shutdown. From December 2018 through January 2019, the government shut down for 35 days.
Q: How might a government shutdown affect your 401(k)?
Shutdowns usually don’t have that big of an effect on the stock markets. Data suggests that the S&P 500 fell an average of 0.4% in the week before a shutdown. And gained a total of 0.1% over the length of all shutdowns since 1976.
It’s rare for a government shutdown event to have a lasting impact on stocks. Even if the financial media headlines suggest otherwise.
That said, our economy is in a tricky period right now. Persistent inflation has led to rising interest rates. Most experts are now on the watch for a potential recession. So far, a strong labor market and solid consumer spending have staved off an economic decline.
Rising interest rates have eroded the value of 401(k) bond mutual funds. Including the popular target date mutual funds that invest heavily in bonds.
Stock market volatility can erase any of the fragile year-to-date gains. For all 401(k) stock market mutual funds.
History suggests government shutdowns aren’t a major problem for 401(k) investors. But that does not mean you can’t pay close attention to your 401(k) mutual funds now.
A second opinion on your current 401(k) mutual funds may be warranted now. Due to the uncertainty of a government shutdown. And the ensuing headlines.
Be proactive with your 401(k) investment management. Don’t be surprised. Like the majority of 401(k) investors. If fear makes a run for your 401(k) principal.
MEET THE AUTHOR
Ric Lager is a Registered Investment Advisor specializing in 401(k) advice. He helps 401(k) participants improve their mutual fund decisions. The 401(k) self-directed brokerage account is a large part of his practice.
Ric provides independent, third-party fiduciary investment advice. He is not paid to sell 401(k)'s. Ask him about your current 401(k) mutual funds.
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