Commentary: Aon Hewitt, a recordkeeping firm that works with mainly large employers, recently reported that 401(k) plan participant trading on Friday, August 21 was twice the normal level. Aon Hewitt also said that on Monday, August 24 participant trading was seven times normal. The firm noted that virtually all trading movement on those days was out of equities and into fixed income. In the event you don't recall, the Dow Jones Industrial Average closed down 531 points on Friday, August 21 and down 588 points on Monday, August 24. At one point on Monday, August 24 the DJIA was down 1,000 points.
Your 401(k) plan's trading activity for those days probably mirrored Aon Hewitt's book of business. In other words, many of your participants were probably selling out of their equity funds and moving into fixed income funds at precisely the wrong time. All who practiced this strategy likely locked in large losses when they sold out of their equity positions at the worst possible time -- when the equity markets were down sharply.
Also see:
If your 401(k) plan investment adviser is like me, he/she works very hard to make sure that this does not happen. That your participants do not panic. That they understand that equity markets are volatile and will go up and down sharply without warning. I feel the best service we advisers provide for your plan participants is educating them about market volatility and being ready to take their phone calls when they are scared and about to make a bad decision. I spend a lot of time talking with my client's participants about these very subjects.
To help those participants who recently exited equities, and to reassure those who maintained their equity allocations, please consider communicating the following:
- If you resisted the urge to sell when the markets were down sharply, congratulate yourself on having the courage to stick with your investment plan. As a long-term investor, you should not be concerned about these short-term market moves.
- We are likely not done experiencing extreme volatility in the equity markets. Continue to resist the urge to exit equity funds on days when the equity markets are down.
- If you sold out of your equity funds, and you are more than five years away from retiring, call the investment adviser that works with your plan and develop a strategy to re-allocate your account balance back into equities based upon your ability to bear risk.
- As always, if you are concerned about what is happening in the markets, please call the investment adviser associated with your plan before making any transfers in your 401(k) account.
Also see:
Extreme market volatility does not last forever. However, mistakes participants make by selling out of equity funds at the wrong time can damage their prospects for retirement significantly. Make sure you communicate with your participants during these times of market stress.
Robert C. Lawton, AIF, CRPS is President of
