A few months into the public health crisis and market downturn, many people have likely logged in to their retirement accounts online and discovered the negative toll the pandemic has taken on their balances.
But there’s good news: What’s happening to retirement plans today is not the same as what they went through during the Great Recession a decade ago. And that’s why it’s important not to make moves in haste today based on what happened back then.
Still, some plan participants are cashing out or are no longer contributing to their retirement plans. But, according to Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, those might be the two worst things people could do right now.
Smart Business spoke with Altman about what’s happening to 401(k) plans and what moves should, or shouldn’t, be made to mitigate losses.
What has happened recently to 401(k) plans?
Asset levels in retirement plans have been falling, but slightly less than in other investment accounts because, as a whole, retirement plans are generally moderately aggressive.
These plans have been somewhat more resilient because of actions taken by the federal government. For example, the SECURE Act included provisions that are beneficial, long-term, to participants, such as automatic enrollment and escalation of deferral. Also, the CARES Act removed the requirement for minimum distributions for those participants, which means they can keep more money in their plan. And the Paycheck Protection Program allowed retirement plan contributions to be included in the payroll calculation when companies applied for the program’s loan, so employers can continue to make retirement plan contributions.
How have those with 401(k)s reacted to the market’s effect on their retirement plans?
Some participants have taken their money out of the market. Other participants have stopped putting money into their 401(k) plan. In the long-term, both these moves are likely going to be detrimental to those participants. Much of the losses in the market have already come back. Those who took their money out won’t capitalize on those gains. And those who have stopped putting money into their plans have lost the benefit of buying low. Both will have less money in their retirement plan accounts because of those hasty moves.
What should plan participants do right now?
Retirement plans are perfectly designed for this kind of volatility. It’s a systematic investing approach by which participants make regular plan contributions over a long period of time. Participants that are making contributions can take advantage of volatility when the market goes down because they’re buying low. And there are also opportunities to rebalance portfolios to take better advantage of a down market. So participants should be focused on dollar-cost averaging to maximize the opportunity.
Most plans are set to be automatically diversified or rebalanced on behalf of
the participant by a professional money manager. For those who manage their own plans, it’s important to stay balanced and diversified. Don’t try to time the market. Keep the bigger-picture perspective and rebalance according to a long-term strategy.
Who should plan participants talk with before they make changes to their plans?
Before sponsors or participants make any changes related to the design of their plan, they should discuss with an adviser what moves could be made to enhance the plan or protect it from additional risk.
But the worst thing someone with a 401(k) could do right now is take their money out of their plan or stop contributing. There are still opportunities for these plans to make money. Some may decide to make their portfolio more conservative to lower their risk exposure, but they should absolutely continue to make contributions, especially if they have an employer match or a profit- sharing contribution.
Bottom line: Don’t panic. Instead, leverage the advice of professional management, and stay balanced and diversified with an allocation strategy that matches your risk tolerance and time horizon.
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