By Alessandra Malito, MarketWatch
March was a roller coaster for the stock market, but it turns out many 401(k) participants can stomach the twists and turns.
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.07% and S&P 500 /zigman2/quotes/210599714/realtime SPX +0.48% , among other benchmarks, saw major drops in the last month, as much as 30% from their Feb. 19 peaks. The volatility was in response to oil price wars and the fear of what coronavirus will do to global economies. In the last week, the market has rallied, as there are signs that social distancing is slowing the spread of the disease.
Still, seeing any sort of drop — even when the cause is understood — is scary, especially when it affects life savings. Many Americans rely on the market to fund their futures, with much of their portfolio performance tied to equities. So how did investors handle the sudden dips?
Many investors did trade, but they didn’t make drastic changes, according to Alight Solutions 401(k) Index .
The month saw 18 “above-normal” days of trading activity, which is the most in one month period the index has seen in the last 20 years, Alight found. Most of the trading migrated to stable value funds, money-market funds and bond funds, and out of target-date funds, large U.S. equity funds and international equity funds. Slightly fewer people made new contributions to equities, from 68.2% in February to 67.3% in March.
There was an uptick in contributions for Fidelity investors, however — 7% in the first quarter of 2020, versus 6% in 2019 — but there was also 5% who decreased contributions, compared with 3% the year before. Another 2% stopped contributing, about the same as the year before. Slightly more customers requested hardship withdrawals in the first quarter — 1.4% between January and March, compared with 0.9% during the same time in 2019.
About 7% of 401(k) savers made an exchange, such as a change to their allocation, in the first quarter of 2020, compared with 5% in the first quarter of 2019, according to the firm. A majority of the savers who made a change did so in March, but only 3% of these investors switched to 0% equities.
Betterment, an online investment platform, had less than a 2% increase in portfolio withdrawals, and 26% more total customers making ad hoc deposits than withdrawals. Millennials in particular were more likely to deposit money into their accounts than pull money out.
Client engagement peaked during the beginning of the volatility at Charles Schwab, /zigman2/quotes/201281754/composite SCHW -0.28% said Nathan Voris, managing director of business strategy at Schwab Retirement Plan Services. There were more calls and online communication with customer service, and 60% more people requested an appointment with an advice consultant than before, he said. “The biggest question we get is what should I do?” he said. “People tend to stay the course. They call in, get a gut check, have someone tell them it’s going to be OK and continue to think long-term.”
Vanguard clients also traded, but were disciplined, according to the firm’s research. Nine out of 10 investors continued as normal and only half of the households that did trade made just one transaction between Feb. 19 and March 20. Much of the trading involved moving to equities, which is traditionally riskier. Older, wealthier investors did move money to fixed income. Those who have only a defined-contribution plan, such as a 401(k), with Vanguard had the lowest levels of trading.
Near-retirees have to be more cautious in the midst of market volatility. They’re expecting to need their money sooner, so the main goal is to preserve their assets. But younger investors can be a bit more relaxed about market ups and downs, because they have decades between today and retirement to recover losses and grow their portfolios.
Defined contribution investors may just be used to the ride of investing. During the 2008-2009 financial crisis, when the markets dropped nearly 50%, many investors “stayed the course,” according to J.P. Morgan Asset Management. Almost 97% of participants continued to make contributions and for the most part, withdrawals did not increase. More than 85% of investors did not make a change to their investments.
Riding out market volatility is imperative to keeping a portfolio intact and seeing returns. An account balance may be lower during volatility than it was before, but investors have only lost that money officially when they withdraw it from the market. Contributing to a plan during volatility can help an account recover more quickly, while exiting in the middle of the turmoil can be detrimental, said Katherine Roy, chief retirement strategist at J.P. Morgan. “You miss some of the best days.”
During the financial crisis, the total value of assets in participant accounts recovered in about two years . In 2007, there was $3 trillion in 401(k) plans exclusively, and that figure dropped to $2.2 trillion in 2008. By 2010, investors had a total of $3.1 trillion in their accounts. In 2018, 401(k) plans had $5.2 trillion, according to J.P. Morgan Asset Management.
Of course, not all 401(k) participants are familiar with market volatility. Newer entrants, such as those within the last decade, have generally only seen stocks climb during the nearly 11-year bull market. For them, and all investors, keeping perspective will be key to making it through the volatility, Roy said.
“This time around, it’s more difficult because we are out of control for so many other things in our daily lives,” she said. “Focus instead on what you can control. How you save versus spend.”