What Recent Bank Failures Mean for Retirement Investing

A closer look at the recent banking crisis and its potential impact on retirement savings.


Headlines recounting the failure of banks naturally draw concern, given they’re a marker of many of the darkest periods in American economic history. For anyone saving for retirement, this type of news likely comes with the fear of a downturn in their 401(k) and other investments. At Betterment, we manage our portfolios in a manner designed to help investors weather such risks and reach their goals.

We discuss the potential impact of recent developments on retirement accounts in this note, addressing the risk of further troubles in the financial system, the possible effects on stock investments within portfolios, and the ramifications for bond allocations. 

Will the crisis spread to other banks and industries?

A well known characteristic of bank runs is that they have an ability to snowball. They are by their nature self-reinforcing, so investors now worry whether, after Silvergate, Silicon Valley Bank (SVB), and Signature Bank, there may be more shoes to drop. We believe, however, that the extraordinary measures taken jointly by the Federal Reserve, Treasury department, and the FDIC have the ability to stop this bank run in its tracks.

Such measures include ensuring all depositors at the failed banks would have full access to their funds and that other banks could borrow from the Fed on favorable terms to meet their liquidity needs. The FDIC has also entered an agreement with a subsidiary of New York Community Bancorp, to purchase Signature Bank. They continue to seek bids for SVB.

Since then, stability concerns have also plagued Credit Suisse and First Republic Bank. In a series of rescue efforts, UBS is set to acquire Credit Suisse while several large U.S. banks have deposited a total of $30 billion into First Republic Bank. There may be more volatility to come, but the strong intervention on the part of policymakers and acquirers gives us confidence that these failing and struggling banks do not represent a significant systemic risk, i.e. one that threatens the entirety of the financial and banking systems.

What is the fallout for investments in stocks?

So far, apart from pockets of the market including small regional banks, stocks have held up well in the face of this historic hiccup in the financial system. Fortunately, Betterment constructs globally diversified portfolio strategies which reduce the risk of being overly exposed to a particular sector like banking. We have not seen our broad allocations to US, international developed, and emerging market stocks in portfolios suffer significant drawdowns, and we maintain conviction in holding these investments for the long-term.

The Betterment Core portfolio does also hold an explicit allocation to small-cap and mid-cap value stocks, accessed via the Vanguard Small-cap Value Index Fund (Ticker: VBR) and Vanguard Mid-cap Value Index Fund (Ticker: VOE). These funds contain exposure to some of the regional banks that have experienced selloffs, and they were among the funds most impacted in the portfolio following the failures of Silvergate, SVB, and Signature Bank. Yet these funds remain well above their 2022 lows, and we believe the Core portfolio’s allocations to them are sized appropriately to manage risk, with VBR and VOE holding around 5.8% and 6.9% weights in a 90% stock version of the portfolio, respectively.

What do the bank woes mean for bonds?

Betterment recommends, and in most cases enables through an automatic glidepath, investors closer to retirement or who have already retired maintain a relatively larger weighting to bonds in their portfolio compared to investors with a longer time horizon. Bond prices have adjusted to a shift in expectations for the interest rate environment in the wake of the bank failures. Due to the financial instability, the market has begun to behave as though it expects the Federal Reserve may not aggressively increase its policy interest rate in the future.

This repricing of expectations has generally caused a decline in fixed income yields, and the diversified bond funds used in Betterment portfolios have overall provided a positive return in the days after the failure of Silvergate, SVB, and Signature Bank. Given that inflation remains high, the risk remains that bonds will face challenges, yet we believe that the parts of the bond market to which we allocate within portfolios continue to be appropriate for retirement investors in how they balance risk with return.