The COVID-19 pandemic has wreaked havoc on 401(k) retirement plans. Between Feb. 19, 2020 and March 23, 2020, investors saw their retirement savings cut by a third. And yet, when the Employee Benefit Research Institute surveyed workers, in late March, 63% still expressed confidence in their ability to live comfortably during retirement.
Unfortunately, confidence seldom meshes with reality. Many investors still believe that Social Security will provide the bulk of their retirement income when the truth is the Social Security program probably cannot continue like it is. It is up to workers to provide the bulk of their retirement income while Social Security will merely supplement. We believe investors—nor businesses—should rely on the government to take care of you.
So, where does that leave investors? Thankfully, the market has recovered a majority of what it lost, and it is sitting around the same levels we saw in December 2019. Hopefully, you did not touch your 401(k) by cutting your contributions or moving your investments to cash equivalents during the trough. Provided you continued to invest, you did exactly what is recommended: dollar-cost averaging money into the market.
In general, 401(k)s are set up so that workers contribute a set amount each pay period. During down periods, your contributions buy more shares of your investment selections. When market prices recover, your investment buys fewer shares; however, your overall balance is likely more because you were able to purchase more shares when prices were low, and they enjoyed the benefits of recovery. Dollar-cost averaging works best in tumultuous times as you will likely receive a better than average cost over time.
That said, you should also take a close look at your risk tolerance and asset allocation. Did your portfolio do what your risk tolerance designed it to do? Did you lose more or less than the overall market? Do you have the investment horizon to recover your losses? Many plans offer risk-adjusted strategies to help you make wise investment choices. Additionally, you likely need to rebalance now. If you had a 50/50 split between growth equity investment and bond funds, you now likely have a 65/35 split in favor of equities, meaning more of your portfolio is at risk for future downturns.
We highly recommend you log in to your 401(k) administrator’s platform and look at the tools available to you. Most administrators have a wide variety of calculators to help you determine how much you may need for retirement and how close you are to being on track to meet that goal. You should be able to set your account to automatically rebalance on specified intervals and change your allocations if your risk tolerance has changed since you last looked at your investments.
Your plan administrator may also have advisers available to help plan participants. This is a huge benefit that your company pays for—take advantage of this. They can answer questions that are specific to your plan and your situation. You don’t have to navigate investing through a pandemic alone!
These are just a few of the steps you can take to keep your 401(k) on track during volatility. If you have questions regarding your 401(k) plan or investment choices, the experts at Henssler Financial will be glad to help: