Money Manager’s COVID-19 Message: Stay the Course

Defined contribution (DC) plan participants are understandably concerned about their retirement assets, given the bout of severe coronavirus-related market volatility that at one point saw the S&P 500 touching levels 30% below its February 19 peak.

Asset levels have recovered some of their losses in the past two weeks, but the market remains in and around bear territory, observes Katherine Roy, chief retirement strategist at J.P. Morgan Asset Management. While she commiserates with their concerns, Roy says she is optimistic that participants will demonstrate the grit, humility and resolve necessary to navigate this challenging environment successfully.

Battle Hardened Participants

“People have seemingly been battle hardened by their experiences from the Great Recession of 2008, or in the case of the youngest investors, by watching their parents go through the Great Recession,” Roy says. “We hope the lesson has been distilled that for long-term investors and even for retirees, it’s really best to stay the course when something like this happens.”

Roy recalls the dark periods of the Great Recession, when markets saw half their value wiped out in a matter of weeks. At that time, daily volatility hit an all-time high that has only recently been eclipsed by the market’s reaction to the COVID-19 pandemic. Even so, participants back in 2008 and 2009 did not flee the markets at the bottom—in fact quite the opposite occurred.

“Rather than panic and act on their emotions, the vast majority of participants allowed their DC plans to do the job they were meant to do,” Roy recalls.

She cites data from her firm and from the Investment Company Institute (ICI) showing almost 97% of participants continued making contributions during the Great Recession. At the same time, withdrawal behaviors generally did not increase, and more than 85% of participants did not make an investment change to dial down risk.

“It is actually surprising to look back and see that, by 2010, the total value of assets in participant accounts had recovered from the sharp lows we saw,” Roy says. “In my mind, I remember it taking longer, but it goes to show you how quickly we can bounce back from even some very troubling times. I hope and expect that many Americans have taken this lesson to heart and that they are staying the course right now.”

New data shared by Voya Financial seems to demonstrate as much. According to the firm’s most recent survey work, the majority of Americans feel nervous (71%) about their finances during this volatile time, yet most individuals (86%) feel that “staying the course” and having a long-term view on their investments (85%) is the most important thing they can do right now. These figures are noticeably higher among those who were working with a professional financial adviser and those who participate in a retirement savings plan.

“While fluctuating markets and the uncharted waters of today are clearly creating concern and anxiety for most, we are extremely encouraged to see that, so far, individuals are sticking with their long-term investment strategy,” says Charlie Nelson, CEO, retirement and employee benefits, Voya Financial. “We’re seeing this with our own plan participants as well.”

Nelson adds that the number of participants moving money between funds in a retirement plan is still very low. Less than 3% of Voya’s total retirement plan participant base made a trade in their accounts during the first quarter of 2020, indicating that 97% of participants have stayed the course thus far. In addition, Nelson highlights, just 2.1% of participants made a change to their future investment elections in the first quarter of this year, compared with 1.3% in the first quarter of last year.

It is inevitable that some Americans will have to draw loans and hardship withdrawals from their retirement savings, Nelson says, but the economic growth of the decade that followed the Great Recession, paired with the retirement industry’s focus on holistic financial wellness, have hopefully prepared more people to deal with this situation.

“Ultimately, we believe it’s important for individuals to, generally, have a plan and not make unwarranted changes, to stay invested and to continue to contribute to their retirement plan so they can save for the future and achieve their broader financial wellness goals,” Nelson concludes.

Plans Inspire Confidence During Crisis

In the midst of the coronavirus pandemic and its early toll on the economy, Empower Retirement similarly asked more than 2,000 Americans who are saving in DC plans how they are reacting to the effects of the coronavirus. The results show resiliency, and, in a separate analysis of call center and website traffic to Empower Retirement, plan participants have not demonstrated large scale movements away from their existing investments.

“American retirement investors are showing great fortitude and showing a strong desire to stick to their plans, even in some very tough market conditions,” says Edmund F. Murphy III, Empower Retirement president and CEO. “This is not to say they are disinterested. Our customer call centers have seen a significant spike in calls. Americans with retirement savings plans are asking about other investment options available to them, they are checking their balances and they are inquiring about what we think the market is doing.”

Like Voya, Empower finds market confidence is higher among those with investments in a DC plan, which Murphy says indicates “a level of calm among long-term investors.”

“Those surveyed are refraining from hasty action, saying they do not plan to sell or shift investments in light of current events,” he notes.

In yet another survey, this one from Bankrate.com, two-thirds (66%) of U.S. adults with retirement and/or investment accounts said they “intentionally did nothing” with their stock-related investments such as mutual funds or individual stocks in response to recent market volatility. However, 15% of U.S. adults have intentionally cut current spending due to concerns about the stock market.

The survey also found that 13% of investors contributed more to stock-related investments during the turbulence, while 11% moved money out of their investments; most investors in households with incomes of $30,000 or more stayed the course in response to the volatility. As expected, lower-income households had the highest likelihood of moving money out of stocks (20%), while high-income households were more likely to have added to their stock-related investments.

Among age groups, Millennials were more likely to contribute more to stock-related investments in response to the volatility, according to Bankrate.com. On the other hand, Millennials were also most likely to move money out of stocks.

The Employer Perspective 

ISS Media, the publisher of PLANSPONSOR, also fielded its own pulse survey on the impacts of the COVID-19 pandemic and received 387 responses across a wide range of employer sizes.

The results show that employers are pretty evenly split in terms of being “somewhat,” “moderately” or “very” concerned about the impact of the coronavirus on their organization’s ability to operate. While the percentage varied by employer size, generally less than 10% of organizations feel their organization needn’t be concerned.

Employers in the ISS Media pulse survey are also pretty evenly split on the question of how their daily operations have been impacted. Roughly half say some employees are unable to work, but others are now working from home or in modified office arrangements, while a smaller but still sizable group says their daily business operations have not yet been impacted directly by the pandemic. About half of employers seem to be weighing layoffs of furloughs and enacting hiring freezes, while about one-quarter are contemplating mandatory salary reductions.

Even with so many emerging challenges, the ISS Media data shows, employers at least at this stage appear to be remaining committed to funding their benefits programs. For example, the data shows only smaller organizations are thinking of freezing their pension plans in response to the pandemic, while around one in four plans are evaluating their DC plan’s safe harbor status, with larger plans more likely to be doing so.