Stock Market Drop Concerns 401k Participants
Stop market drops can change an investors vision of risk and the future. The stock market drop over the last quarter may be enough to give your 401k investors the jitters. Many likely want to know how this stock market drop impacts their retirement savings, and they may be looking to their employers for answers.
Fourth-quarter retirement plan statements should be hitting participants’ mailboxes soon, and account balances will reflect the Q4 2018 stock market drop, potentially inciting panic. As such, plan sponsors may soon be facing questions about why workers’ balances are showing a loss due to the sharp stock declines in Q4. It’s an understatement to say 2018 was a rough year for stocks — it was the worst since 2008, and only the second year the S&P and the Dow fell in the past decade. The Dow Jones Industrial Average dropped 5.6%. The S&P declined 6.2% and the Nasdaq fell 4%.
Does that which goes down stay there? As of Monday, January 7 at noon Eastern, all of the stock market indices are trading in positive territory. So what’s the point? Simply this: Participants may be in a panic when they see the Q4 stock market drop reflected in losses in their retirement account balances, but employers should remind them that investing for retirement is a long game.
The situation may not be THAT bad. Only about 8% of retirement savers have 100% of their assets in stocks, according to a source from Fidelity quoted in USA Today. Most retirement plan portfolios, including target-date funds, are made up of a well-diversified mix of asset classes, including stocks, bonds, and cash, which helps to mitigate risk and minimize losses. In light of that, it’s a good idea again for employers to remind plan participants to stay the course and keep the asset allocation in their portfolios on track.
One proactive step employers can encourage participants to take in the wake of the stock market drop is checking on their portfolios to make sure they’re still in line with their time horizon to retirement and still in line with the financial goals they want to achieve for retirement. It is also important to remember that target-date funds may not be a panacea. Although their portfolios are designed to become more conservative as retirement plan participants approach retirement, they still contain a fair amount of exposure to stocks, which may not protect participants from short-term losses as much as desired.
In addition, employers should remind participants that buying high and selling low is not a good investment strategy for anyone, especially retirement savers! On the December 29 episode of his “The Truth About Money” radio show, Ric Edelman, chair and co-founder of Edelman Financial Engines, gave this example related to the recent stock market drop: Monday, December 24, the Dow fell 653 points. On Wednesday, December 26 — the day after Christmas — the Dow shot UP 1000 points.
So anyone who sold (in a panic or out of necessity) on Monday may have experienced significant losses, whereas if they’d held on through the stock market drop on Monday, they could have gained back their recent losses, and then some. This is why it’s important to remind retirement plan participants not to let their emotions get in the way of their investing strategy, and that maintaining a steady course for the long term is the preferred strategy to stay on track for a financially secure retirement.
Of course, a significant stock market drop is a good reminder for employers to take a look at their existing investment line up and make sure the funds are still performing in line with the objectives set forth in the plan’s Investment Policy Statement (IPS) – especially if it’s been a while since the last review. One quarter does not a trend make. However, if the funds on the investment menu have performed poorly for several consecutive quarters, it may be necessary to put them on a watch list or swap them out for better-performing funds. Investment reviews should be conducted at least annually. Keep in mind the fiduciary obligation to act prudently when selecting and monitoring plan investments. Make certain the line up is diversified, and ensure the investment fees are reasonable.
In short, yes, the stock market experienced a significant drop in the last quarter of 2018, and that will likely send many 401k investors into a tailspin of worry. Employers can help by steadying nerves and encourage participants not to act out of emotion. Remind them that they are investing for retirement for the long term, so it’s important to stay the course when it comes to their investments, despite a sizable drop in the stock market.