Market volatility can cause even the most experienced investors to feel anxious, especially about their 401(k) accounts. Sudden downturns and unexpected swings in the stock market may prompt them to question their strategies and move to more conservative investments. However, it’s important for both plan sponsors and employees to maintain a long-term perspective when it comes to retirement plans. Here are a few things plan sponsors should keep in mind to protect 401(k) investments during volatile markets.
Staying the Course During Volatile Periods
When saving for retirement, it’s key to focus on the goals of a 401(k) portfolio. A 401(k) plan is a long-term investment designed to replace an employee’s income once they retire , which can often be decades down the road.
When markets drop, it’s natural to want to sell more aggressive investments like stocks in favor of more conservative options. However, selling during these times is often counterproductive. By selling when markets are down, you lock in your losses, making it harder to recover when markets eventually rebound.
While downturns are unsettling, the stock market has shown consistent growth over time and selling investments during these times can be even more costly. Historically, markets recover after sharp downturns. For example, according to JP Morgan Asset Management, between January 1, 2004, and December 29, 2023, seven of the best 10 days in the stock market occurred within two weeks of the 10 worst days.
Over that 20-year period, a portfolio invested in the S&P 500 returned 9.7%. But by missing out on the best 10 days during that time, returns would drop to just 5.5%. And by missing the best 50 days over that same period, the portfolio would be down 2.8%.
Designing a Diversified Portfolio
While staying invested in volatile markets is important, it’s just as critical for plan sponsors to provide the investment options needed to design a diversified portfolio. A well-diversified 401(k) portfolio includes investments across various asset classes, such as stocks, bonds, and cash equivalents. Each of these asset classes perform differently in various market environments, helping reduce the overall risk of the portfolio.
If a 401(k) portfolio is overly weighted toward one specific sector or asset class, there are options or strategies available to help provide additional diversification, such as target-date funds, managed account solutions, or model portfolios. These options help employees automatically rebalance their portfolios as they approach retirement, being more aggressive when employees are young and more conservative as employees near the end of their careers.
Designing a Plan to Weather the Storm
Plan sponsors can help participants navigate volatile markets by offering broadly diversified investment lineups, plan design features that encourage long-term investing, and employee education.
Unlike other investment portfolios, 401(k) plans are participant-directed and include employees with varying time horizons, risk tolerances, savings rates, and retirement goals. As a plan sponsor, it’s important to offer a variety of asset classes so that each participant can create a diversified portfolio. This includes investments across different market sizes, international options, bond funds, and diversified options like target-date funds.
Since employees are required to take out mandatory distributions in retirement, plan sponsors should focus on risk-adjusted returns and downside protection within each investment option.
They should also consider options like automatic enrollment and escalation, which place employees into diversified portfolios and increase their contribution rates over time, even during volatile markets.
In addition, education and financial wellness programs that offer resources on investing for retirement can help employees avoid making emotional decisions in turbulent markets.
If you’re uncertain about how to invest your plan to withstand volatile markets, take advantage of professional advice. For plan sponsors, a financial advisor can help construct a portfolio that meets employees’ needs and set up a plan design and education program that can help employees meet their retirement goals in any market environment.
To learn how Sequoia can help, reach out to our team.
Disclaimer: This communication is intended for information purposes only and should not be construed as legal or tax advice. It provider general information and is not intended to encompass all compliance and legal obligations that may be applicable to your situation. This information and any questions as to your specific circumstances should be reviewed with legal counsel and /or a tax professional.
FOR PLAN SPONSOR USE ONLY. Pensionmark® Financial Group, LLC (“Pensionmark’) is an investment advisor registered under the Investment Advisors Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC). Pensionmark Financial Group, LLC/Pensionmark Securities LLC and Sequoia Consulting Group are non-affiliated entities.
