Financial advisors have been urging 401k investors to sit tight and ride out the COVID-19 market volatility, and new research shows 401k plan participants are largely doing just that.
According to Morningstar, only 5.6% of participants enrolled in a 401k plan as of December 31, 2019, changed their portfolio allocations during the quarter of 2020.
Backing that up, Empower Retirement studied how the 9.5 million participants in the retirement plans and IRAs it manages reacted after U.S. stock indices went from record highs in mid-February to wiping out more than three years of gains by March 23. Of that group, 99.3% had made no changes to their retirement investments as of March 30 and only 16% even logged in to check on balances, according to a April 19 article in The Denver Post. About 2.1% boosted their contribution rate, while 1.4% lowered it.
“As we move out of a period of unprecedented volatility, we saw that, for the most part, retirement investors did not give over to emotional selling,” Empower President and CEO Ed Murphy said in the piece. “The American retirement investor has shown great fortitude and tremendous resolve in the face of historic market volatility.”
The recent market volatility, and subsequent impact on balances (Morningstar found the median 401k balance declined 11.2% during Q1 2020) has left many investors wondering what they should be doing with their portfolios.
The answer for most people, the Morningstar report says, is not too much.
“Assuming you’re in a risk-appropriate, well-diversified portfolio the best approach is probably to hang tight,” the report summarizes. “While the rise of prepackaged multi-asset solutions, such as target funds, and in-plan professional advice, such as managed accounts, has made it easier for investors to get an appropriate portfolio, many participants still choose to go their own path and build their own portfolios.”
While some say checking 401k account balances has taken a back seat to health concerns or immediate financial issues during the crisis, it is still important to recognize that “staying the course” allows 401k participants to avoid locking in losses when the market turns back around.
During the current crisis, it has often been noted that one of the worst things retirement savers did during the 2008 financial crisis was they stopped contributing to their 401ks, which has stunted the potential growth of their retirement account balances since.
Based on these new statistics from Morningstar and Empower, 401k participants have so far resisted the temptation to stop contributing, withdraw funds or otherwise make changes to their accounts.
Self-directed investors making more changes
“Keep Your Distance: 401k Participant Investment Behaviors (So Far) During the COVID-19 Crisis,” released April 17 by Morningstar, found there is significant variation in the percentage of 401k plan participants making changes based on how they were invested.
For example, 10.8% of participants self-directing their accounts made a change, compared to 2.4% of participants using a target date fund, 1.8% of participants who opted into managed accounts, and 1.3% of participants who were defaulted into managed accounts.
Morningstar says the research strongly suggests that there is an additional value associated with professionally managed investment solutions for 401k participants because participants using these options were less likely to make changes during the period of recent market volatility. “Participants need help, and it’s essential that plan sponsors make professionally managed investment solutions, such as target date funds and managed accounts, available to help keep participants on the road to a successful retirement,” the paper concludes.
Empower seeing big increase in call volume
At Denver-based recordkeeper Empower, which announced last week that it will not lay off any of its workers for reasons related to the COVID-19 outbreak, Murphy says there has been a significant uptick in calls among its 9.6 million participants.
“At its peak, we were running about two to two and a half times the normal volume,” Murphy said. “We typically take 15,000 to 18,000 calls a day. We are now taking anywhere between 30,000 and 45,000 calls a day. That’s leveled off somewhat, but we’re still seeing a tremendous amount of inquiries.”
Specific to the CARES Act, Empower has also seen a higher number of questions about loans and distributions than in the recent past.
Plan participants who have lost income during the crisis are obviously less likely to stay the course and more likely to borrow against their plans or spend some of the balances outright, something the CARES Act makes easier to do without penalties. Advisors have quickly risen up to caution this should only be done as a last resort.
“We believe that difficult economic circumstances will likely lead to increased demand for short-term cash on the part of some participants,” Murphy said in The Denver Post. “Empower recently announced that we are waiving fees on all new retirement plan loans and hardship withdrawals. We believe that there will be high interest in loans and hardships.”
- SEE ALSO: Good Reasons Not to Raid That 401k
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
