By now, upwards of 55 million participants in 401(k) plans have received account statements for the first quarter of 2018.
What they have seen in those statements is a significant deviation from the past two years.
“Returns won’t be what they have been,” said Anne Ackerley, managing director of BlackRock’s U.S. and Canada defined contribution group.
“That will surprise some people. Markets have been volatile in the first part of this year. Plan participants won’t be seeing the big increases in account values they’ve been used to.”
The reemergence of volatility in equity markets this year may be an invitation for some participants to make hasty decisions with their retirement savings plans, potentially to the detriment of securing a stable path to retirement, says Ackerley.
“When markets get volatile, we really focus on getting the message to participants to stay the course, and remind them of the importance of developing good savings habits,” she said.
On balance, they are staying the course, at least through the first part of 2018, says Ackerley.
The robust performance of equity markets in 2016 and 2017 has more participants confident in their retirement prospects. In BlackRock’s most recent DC Pulse Survey, 61 percent of participants said they were on track to retire with enough savings to live their lifestyle of choice; nearly half cited investment performance as reason for their confidence.
But markets don’t always go up. Those reporting confidence in their retirement prospects seem to acknowledge that. BlackRock found that the savers with the most secure sense of their retirement have also developed optimum saving habits. They contribute enough to maximize their employers’ matching contributions, they save the maximum amount they can at all times, and they make saving for retirement a priority.
The prolonged bull market only tells part of the story of growing confidence among 401(k) investors, according to Ackerley.
“Our findings were clear. The people most confident of being on the right track for retirement are the ones that have developed good savings habits,” she said.
TDFs have tempered worst instincts to jump ship
These days, the vast majority of 401(k) savers have little interest, or stomach, to time markets.
That wasn’t always necessarily the case. The financial crisis of 2008 spurred unusual activity in 401(k) plans. In 2008, 13.5 percent of participants changed the asset allocation of their accounts, according to analysis of 22 million 401(k) accounts by the Investment Company Institute. By comparison, just 8 percent did in 2017.
And in 2009, when the Dow Jones Industrial Average found its bottom in March of that year, 10 percent of participants changed their asset allocation, and another 9.8 percent changed the allocation of their contributions. Perhaps even worse: 5 percent stopped contributing to their 401(k)s.
ICI’s data does not breakout how participants reallocated their savings. The safe assumption is that many—if not the overwhelming majority—were panicky, opting to move savings out of equities, or stop saving altogether, as markets were searching for a bottom.
Ackerley thinks the lessons of the financial crisis have been learned, as the instinct to jump ship in rocky markets has been tempered for most 401(k) savers.
She also cites the role target-date funds have had in mollifying jittery savers when markets become threatening.
“In 2008, the Pension Protection Act had only been passed for two years,” said Ackerley, refering to the 2006 law that made TDFs a qualified default investment alternative in 401(k) plans.
“Fast forward 10 years, and TDFs are much farther along,” she added.
In 2006, only 5 percent of 401(k) assets were in TDFs. According to research from the Employee Benefits Research Institute, one in four near-retirees had more than 90 percent of accounts invested in equities at the end of 2007; more than two in five held more than 70 percent in equities.
Fewer near-retirees will be as overexposed when the next recession comes, thanks in part to the growth in TDFs. By 2015, total TDF assets eclipsed 20 percent of 401(k) assets, according to ICI. By the end of 2017, assets in TDFs reached $1.1 trillion, up from $229 billion at the end of 2016.
When the bull market finally does end, those savers invested in TDFs should be less tempted to try to time markets through their 401(k) savings, something Ackerley clearly doesn’t recommend.
“Generally, people who manage their own 401(k)s underperform TDFs,” she said.
For TDF savers who are near retirement, staying the course will be just as important as it is for younger savers when the next recession hits.
“Markets can recover pretty quickly,” says Ackerley of the types of swoons that have scared savers into poor decisions in the past.
“Even when you retire, you will still need some equity exposure,” she added.
BlackRock manages nearly $200 billion in its LifePath target-date series. Its Index Retirement Fund vintage, designed for savers when they hit retirement, reduces equity exposure to below 40 percent.
For participants who find themselves at retirement when the next recession hits, the best thing to do with your 401(k) may be nothing at all.
“If you are a year out from retirement, and you are in the appropriate TDF, the best option is to stay the course,” said Ackerley.