“To know your future, you must know your past.”
A new research paper from J.P. Morgan’s Chief Retirement Strategist, Katherine Roy, looked at DC participant behavior in the last major financial crisis, and lessons that can be applied to what’s currently happening.
“Defined contribution (DC) participants are understandably concerned about their retirement assets, given current market turmoil,” Roy wrote. “The S&P 500 has recently touched levels 30% below its February 19 peak, and its best and worst days over a 20-year window have occurred within weeks or even days of each other. What should participants do?”
[SEE THE FULL RESEARCH PAPER HERE]DC participants, their advisors and plan sponsors can take a lesson from the experience of the global financial crisis, she argued, namely: Stay the course.
“Overall, that’s what participants did in 2008–2009, when markets dropped as much as 49% and volatility hit an all-time high. Rather than panic and act on their emotions, most participants allowed their DC plans to do the job they were meant to do: encourage early and regular contributions, discourage market timing and let dollar-cost averaging work for them.
She ticked off a few important Investment Company Institute findings, which found that in 2008 and 2009:
- Almost 97% of participants continued making contributions.
- Withdrawal behaviors generally did not increase.
- More than 85% of participants did not make an investment change.
“The good news is that by 2010 the total value of assets in participant accounts had recovered,” Roy added.
Best practices going forward
She then advised plan sponsors and advisors to encourage participants to do the following:
- Contribute consistently at a level that allows them to maximize the employer match.
- Build an emergency fund, separate from retirement assets, to cover several months of living expenses, protecting retirement assets from withdrawals in a down market.
In terms of managing their portfolios, help participants to see the potential advantages of:
- Maintaining a diversified portfolio allocation that reflects their capacity for risk, based on their savings and withdrawal behaviors and target-date for retirement—recognizing that this risk level should generally decline as they approach that target date.
- Rebalancing routinely back to the appropriate level of risk exposure; market performance can take portfolios off track.
- Investing in professionally managed solutions, like target-date funds (TDFs), that are diversified and periodically rebalanced to keep participants on track.
“Encourage participants to stay the course and avoid responding emotionally or trying to time the markets,” Roy concluded. “Emphasize that their 401k retirement savings programs are designed to work for them—helping them to stay disciplined and on track, even in difficult times.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
