The first trading day of February was one for the ages as equity markets dipped at historical levels and uncertainty still faces the Federal Reserves tapering plans. With these tumultuous market events swirling, 401(k) plan sponsors are keeping an eye on asset levels.
The Dow Jones Industrial Average dipped by 326 points and the S&P 500 faced a six percentage decline. However, with nearly $4 trillion in 401(k) plans according to latest Investment Company Institute data, retirement plan sponsors ought to react to current market roller coaster ride.
Robert Lawton, president of Lawton Retirement Plan Consultants, says that plan sponsors need to act promptly.
Plan sponsors should share the phone number and email address of their investment advisor with their plan participants and encourage participants to talk with their advisor if they have any questions or concerns, Lawton says. Generally, market downturns are the worst possible time to think about transferring account balances out of stock funds. Unfortunately participants may look at their accounts, see losses and feel that is the action to take.
However, Vanguard explained Tuesday that economic uncertainty has not driven participants to increasingly access their nest eggs through either loan or withdrawals. The average nominal account balance for 401(k) plan participants hit a record high of $101,650 at year-end 2013, which was about 18% higher than the previous year. But, this years start does are not reflected in these figures as the bull equity market posted remarkable returns, which proved to boost up 401(k) asset levels to landmark heights.
In 2012, ICI reports that 401(k) plan assets were situated at $3.5 trillion, which surpasses 2007s height of $2.9 trillion in total assets and low of $2.2 trillion in 2008.
Morningstar Director of Personal Finance Christine Benzadds that really volatile markets do accentuate the benefits of providing 401(k) participants with education.
They need education in what is an appropriate asset allocation to maintain, and also education on the benefits of using a strategic approach to asset allocations versus one that is more tactical or market timing oriented, says Benz.
Today, Aon Hewitt Director of Retirement Research Rob Austin downplayed Mondays event by saying there hasnt been much that has happened over the last month, or last few days.
With retirement plans overall, theyre sort of designed for long term investing, theres going to be ebbs and flows, and a lot of plan sponsors have put things in place that offer great tools and resources such as increasing target date funds, or increasing managed accounts.
Overall, target date funds have seen an uptick among 401(k) plan participants, according to data released in December 2013 from the ICI and the Employee Benefit Research Institute. At year-end 2012, 41% of 401(k) participants held target date funds, which was a three percentage point increase. However, the joint report states that 61% of plan participants were invested in equities.
Lawton explains that equities will continue to experience shaky waters as the jury is still out on as to when the market will be comfortable with the Feds tapering plans to limit its quantitative easing monthly-asset purchase by $10 billion.
No one knows how long that may last, he says. 401(k) plan participants should expect a bumpy ride for a while.
He adds that most plan participants will have to stay the course going forward.
The key for most 401(k) plan participants, especially those more than five years away from retirement, will be to ride out the storms, Lawton says.
Austin says that Aon Hewitt, the global leader in human resource solutions, holds the same sentiment.
Its important not to have big knee-jerk reactions, explains Austin. We tend to see that people tend to get out a lot more readily than they tend to get back in, and so people are just locking in the losses.
