Help Panicking 401(k) Participants Stay the Course

Plan service providers can reduce fear-driven missteps

Stephen Miller, CEBS By Stephen Miller, CEBS March 20, 2020
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Updated on April 2, 2020

In mid-March, after U.S. health officials declared that the coronavirus had become a pandemic, the Standard & Poor's 500 index of large U.S. stocks was off more than 29 percent from its recently set all-time high, and the market swung wildly up and down from day to day.

"During any time of market volatility, people get nervous and need reassurance about the long-term health of their retirement savings," said Katie Taylor, vice president of thought leadership at Boston-based Fidelity Investments, a provider of 401(k) plan services. "We're seeing higher call volumes to our customer services center, with people asking if they should be making changes."

If plan participants are more than five years out from retirement, investment advisors say they should stick to their current investments, "assuming that they are appropriately allocated for their age and time horizon. Selling out of investments when the market is down is not the best idea," Taylor said.

"In these trying times, investors should focus on what they have some level of control over—savings and asset allocation—and ignore market returns and policy decisions," said Timothy Ellis, CPA, a certified financial planner at wealth management firm Waddell & Associates in Memphis, Tenn. Unfortunately, he added, "it's the latter that usually draws their attention."

During the Great Recession of December 2007 through June 2009, Taylor noted, when many stock portfolios lost nearly half their value, participants in Fidelity-administered 401(k) plans who stayed invested "saw their balances rebound quite nicely." In 2008, when the stock market hit its bottom, the average 401(k) balance was $79,000. At the end of 2019, the average portfolio size had grown to $360,000, "quite a big jump over an 11-year period," she pointed out.

"We use data like this to remind people about the ups and downs of the market, even in these unprecedented times, and to show why it makes sense to stay invested," Taylor said.

Participants may need to be reminded that if they keep investing, as markets recover, so will their retirement savings, she added. "Sometimes people need to receive that assurance."

If employees keep investing, as markets recover, so will their retirement savings. 

"Withdrawals turn 'paper' losses into actual losses," warned Michael A. Webb, vice president at retirement plan advisory firm Cammack Retirement Group. "If an investor still owns the underlying investments, and those investments increase in value in the future—as they typically do after a bear market—then the loss wasn't actually a loss at all. However, once a withdrawal is taken, the loss is locked in and can no longer be recovered."

Using Vendors as a Resource

HR managers don't need to give investment advice, but they can address employees' fears. The financial services firms that are acting as plan record keepers, administrators and investment advisors can help.

The key to keeping employees informed "is for 401(k) plan sponsors to utilize the vendors they're already using," wrote Christopher Carosa, managing editor of FiduciaryNews.com. "The challenge is to connect those service providers directly to home-based employees."

Taylor said that "services providers have online content that plan sponsors can push out to employees during times of high market volatility like this." HR can also direct employees to their plan service provider's customer website or call center.

"Any educational materials on market timing, the importance of staying invested, and historical downturns and recoveries are extremely relevant and useful now," Ellis said. "If plans have investment advisors, employees should be directed to them for individual advice, or set up an virtual group session to discuss market conditions. Investment advisors, acting as plan fiduciaries, have the ability to stress the importance of staying investing and avoiding market timing mistakes that damage financial plans."

For Baby Boomers who have less than five years until retirement, in particular, "it probably makes sense to talk to an advisor," Taylor said. "A professional can help them work through what they should be doing."

Benefiting from Target-Date Funds

Target-date funds (TDFs), which shift participants' holdings away from stocks and toward less-risky assets as the target retirement year nears, can lessen the downside risk for older participants. But while younger workers were typically enrolled automatically in their plans with TDFs as the default investment, their older colleagues are more likely to have selected their own stock and bond funds, Taylor said, and may not be appropriately allocated for their age.

Another consideration: "Participants who use a 'do it for me' approach such as TDFs or advisor-managed accounts are less likely to make changes during times of volatility, versus 'do it myself' participants who select their own stock and bond funds," she noted. 

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Profiting from Dollar-Cost Averaging

Fidelity has not yet seen a significant uptick in the number of plan participants stopping contributions, making fund exchanges or decreasing their deferrals, Taylor said, but call center volumes have spiked. For the most part, worried participants are asking what's behind the market's volatility and whether they should act.

"One of the beauties of the 401(k) is that you are consistently making contributions and buying into your funds at all different rates," which is known as dollar-cost averaging, Taylor said. "We talk to people about buying in at low prices" through automatic contributions, she added. "It's like stock funds are on sale," with more shares purchased at lower prices. When the market recovers, shares purchased at depressed prices could jump in value—although nobody knows for certain when the market will hit bottom and begin a sustained recovery.

For plan participants who are able to weather the downturn, "this is an opportunity to maintain if not increase contributions into their retirement accounts," Ellis said. While the bear market lasts, "they are investing in stocks that are discounted, maybe as much as 20 percent to 40 percent, from price levels in February. Those contributions at depressed levels will help retirement account balances recover faster."

 SHRM Resource Spotlight
Coronavirus and COVID-19

Avoiding Hardship Withdrawals

As hourly workers see their shifts canceled or cut back and salaried workers begin to fear layoffs, 401(k) plan loans, which participants repay, and hardship withdrawals, which they don't, could become more popular. "We haven't really seen a spike as of yet," Taylor said, but that situation could change quickly.

Remind participants that income taxes and a 10 percent early-withdrawal penalty (if they're younger than 59 1/2) apply to hardship withdrawals, Ellis said. "Maybe a 401(k) loan makes more financial sense for them," he noted. "Generally, loans are limited to the lesser of $50,000 or 50 percent of the participant's vested balance and must be paid back within five years."

The negative effect that hardship withdrawals have on 401(k) savings is being addressed by vendors' call centers and their website content. These resources can help participants create budgets and manage expenses "and, if at all possible, prevent them from permanently taking money out of their 401(k), which is meant to be long-term savings for employees' future retirement," Taylor said.

The crisis is also an opportunity for plan sponsors to think about ways to help employees increase their nonretirement savings, such as by helping them set up savings accounts for emergency expenses.

Behind the Stock Market’s Wild Ride

In other crises, "we've also seen drops of equal magnitude. But we haven't seen it happen so quickly," said Pam Popp, president of retirement services at benefits advisory firm Lockton. She characterized the market's response as "fear-driven in many ways" as the markets "question what's going to happen to global growth and consumer demand."

Market analysts at Callan, an institutional investment consultancy, wrote that the stock market sell-off is the result of "the temporary halt to production and consumption from the [coronavirus] containment measures." They noted that "the initial economic impact is far more sudden and deeper than a typical recession, but the bounce back will be quicker and stronger." They anticipate a quick rebound and view a sustained downturn in economic growth as unlikely.

Maintaining Fiduciary Oversight

Employer retirement committees, which exercise fiduciary responsibility over 401(k) plans, should keep up all their responsibilities—even if committee members are working from home, according to 401(k) advisors.

"As plan sponsors, maintain consistency in the way you oversee your plan," said Popp. "Do your quarterly meetings, and maintain the process that you defined in your investment policy statement. Stay the course as an employer."

Taylor suggested, "Get committee members set up with videoconferencing." Document the committee's review of the performance of plan investments, and be prepared to explain decisions to keep or change any funds, she recommended.

A big reason to document thoroughly, according to advisors: As stocks plummet in value, employers are likely to face a greater risk of lawsuits charging that they were derelict in exercising their fiduciary duty to ensure that all investment decisions, including ongoing oversight, served plan participants' best interests.


Update: The CARES Act Changes Rules for Withdrawals and Loans

The Coronavirus Aid, Relief and Economic Security (CARES) Act, passed by Congress and signed into law on March 27, altering many rules affecting retirement plans. Among the most significant are the following:

401(k) hardship withdrawals

Through Dec. 31, 2020, the act loosens the rules on hardship distributions from 401(k) and similar defined contribution accounts, or from IRAs, giving employees affected by the crisis access to up to $100,000 of their retirement savings without the 10 percent penalty that usually applied to permanent withdrawals before age 59 1/2. Income taxes will still be owed on withdrawn amounts, but the law permits individuals to pay tax on the income from the distribution over a three-year period and allows individuals to repay that amount tax-free back into the plan over the next three years. Those repayments would not be subject to the retirement plan contribution limits.

The waiving of the 10 percent penalty applies retroactively to withdrawals beginning on Jan. 1, 2020, for account holders:

  • Diagnosed with COVID-19.
  • Whose spouse or dependent is diagnosed with COVID-19.
  • Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19 or other factors as determined by the Treasury Secretary.

"While we recognize that too many Americans will need to make tough financial decisions in the near term, we encourage those savers without an urgent need to maintain focus on their long-term saving goals and strategies," said Yanela Frias, president of Prudential Retirement, which provides 401(k) services.

401(k) plan loans

Taking and repaying a loan from 401(k) savings is a better alternative to hardship withdrawals, financial advisors say. Through Dec. 31, 2020, the CARES Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100 percent of the participant's vested account balance for the next six months. Generally, loans are limited to the lesser of $50,000 or 50 percent of the participant's vested balance and must be paid back within five years.

Individuals with an outstanding loan from their plan with a repayment due from March 27, 2020, through Dec. 31, 2020, can delay their loan repayments for up to one year.

Minimum distributions suspended

For retirees, the law suspends for 2020 the required minimum distributions (RMDs) that account holders must take from tax-deferred 401(k)s and IRAs starting at either age 70 1/2 or 72 (for those turning 70 on July 1, 2019, or later). This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.



Related SHRM Article:

Viewpoint: The COVID-19 Economic Crisis May Worsen the Retirement CrisisSHRM Online, April 2020

When Employers Must Cut Their 401(k) Contributions to Stay Afloat, SHRM Online, March 2020

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