The Dow Jones Industrial Average (.DJI) lost more than 800 points Wednesday, experiencing its worst day since the market correction in February. What does market volatility like that even do to a 401(k) plan?
The answer isn't so simple. There's a very good chance every retirement account will be affected by the volatility, since some portion of even the best diversified plans will be tied to equities. To be more precise, how much of an impact the volatility has depends on what funds employees are invested in, how much of their portfolios are allocated to those investments, and when they plan to retire.
"Next month's statement probably won't look so good for people," said Eric Reich, an adviser at Reich Asset Management in Marmora, N.J. "Do not worry about this at all."
Still, investors were worried about their accounts, especially after the Dow Jones Industrial Average and S&P 500 (.SPX) had a rollercoaster ride on Wednesday.
To be clear: On Wednesday, the Dow fell 831.83 points, or 3.2%, to 25,598.74; the S&P 500 index fell 94.66 points, or 3.3%, to 2,785.68; and the Nasdaq Composite Index (.IXIC) fell 315.97 points, or 4.1%, to 7,422.05, its biggest decline of 2018. A correction in the market happens when a stock, fund or indexes drop 10% from a recent peak.
Two-thirds of 401(k) participants were directly or indirectly invested in equities at the end of 2015, according to the Employee Benefit Research Institute, which consists of mutual funds and other pooled investments. The rest was a mix of target-date funds (which are also invested in equities mostly at its inception and then gradually rebalanced to conservative investments as the retirement year of the employee approaches), bond funds, guaranteed investment contracts and other types of investments. More plan participants were invested in stocks at the end of 2015 than before the financial crisis in 2007, the report, which was published in August 2017, found.
In most cases, U.S. stock funds will see the greatest declines, more so than international stock funds, said Kevin Gahagan, a financial adviser at Mosaic Financial Planning in San Francisco. Fixed income bonds are not safe from a decline either, given the potential for rising interest rates. Still, if accounts are well diversified, employees won't see a decline nearly as bad as the market as a whole, he said. "The key for retirement plan participants is to not lose their long-term discipline and react to current market conditions," he said.
The latest market volatility may have come as a surprise for some people, after more than a year of gains that had investors bragging they were "401(k) millionaires," and going so far as posting their balances on social media. Last year, President Donald Trump boasted about the bull market, claiming it as a win under his presidency.
Experts say nobody should react too quickly to the volatility or call the end of a bull market — at least not yet. While the market is sorting itself out, advisers have been telling their clients volatility is to be expected when investing, and for long-term goals, such as retirement, there's nothing to fear.
So what to do right now? Increase contribution rates, rebalance your account if necessary and then forget about it, Reich said. And next time there's a downturn? Consider adding more money to your retirement fund. There's typically a silver lining to the downturns: stocks are "on sale," experts say.