Four 401(k) tips amid economic uncertainty
Financial advisors discuss well-known tenets that apply to 401(k) plans, even as the COVID-19 pandemic continues to impact markets.
In the midst of the economic and financial turbulence caused by the COVID-19 pandemic, taking a close look at recent 401(k) statements may seem like a recipe for additional anxiety — especially for those nearing retirement or facing the possibility of unemployment. Even so, financial advisors are largely telling their clients that keeping an eye on quarterly statements is more important than ever. “Don’t be in denial,” said Peter Mackie, a financial advisor with the Mackie & Waller Wealth Management Group of Wells Fargo Advisors in St. Louis. “Use this uncertain time to reinforce your strategy and set expectations.”
An estimated 63% of U.S. households reported having employer-sponsored retirement plans, individual retirement accounts, or both, in 2019, according to the Investment Company Fact Book (PDF) (Investment Company Institute, 60th edition). Despite the prevailing uncertainty, basic investment principles should still guide how they are managed.
Though you may be afraid of what you’ll see given the recent market variations, you could miss key information about portfolios and holdings if you don’t keep an eye on your 401(k) statements, experts like Mackie say. As scary as recent fluctuations may seem, it’s important to keep perspective. Statements provide only a snapshot in time and need to be considered with future goals in mind.
“It’s always a good time to review your portfolio’s overall asset allocation,” Mackie said. “This is money a lot of people will not touch for a long time.”
Keeping a year-to-year perspective is best. “When you review your statement,” said Mackie, “you should look at your 1-, 5-, and 10-year returns — not only the last three months. It’s much more important to know how your 401(k) plan has performed over many years.”
“It’s always a good time to review your portfolio's overall asset allocation. This is money a lot of people will not touch for a long time.” — Peter Mackie, financial advisor with the Mackie & Waller Wealth Management Group of Wells Fargo Advisors
While it’s important to keep an eye on your statements, checking your 401(k) online more frequently — daily, for example — may increase your anxiety and lead to overly emotional decision-making, which can be detrimental.
During a May virtual panel discussion titled “Rethinking Retirement in the Age of Pandemics,” Kim Ta, Wells Fargo Advisors head of Client Service and Advice, said, “There’s been a lot that’s gone on over the last 30 years,” with regard to the S&P 500.
“Several very volatile market cycles occurred throughout that time. And if you had listened to your fight-or-flight reaction, which is what happens, and withdrawn your money — taken your money out of the market — even for just 10 of the best days over the last 30 years, you would have seen a significant change in your overall return. And if you had missed the best 20 days out of the market out of emotion, you’d be doing just about on par with inflation.”
The asset allocation portion of 401(k) monthly statements deserve particular focus, advisors say. What 401(k) holders are looking to assess may be different according to age group. It’s important for investors to review their current asset allocation to ensure it is still aligned with their target asset allocation and consider rebalancing their portfolio as needed.
Equity funds, which are mostly invested in stocks, are generally more common for people who are closer to retirement. According to the Investment Company Fact Book, for people in their sixties, about 38% of 401(k) account balances are allocated to equity funds.
“If your 401(k) is in all equities, make certain you are prepared to participate in the ups and downs of the market,” said Paul Waller, Mackie’s colleague at Mackie & Waller Wealth Management Group. “To do that, it’s important to have a strategy, be comfortable with your asset allocation, and stick to it.”
Wells Fargo Financial Advisor Amy Cady acknowledged that viewing a statement in these uncertain times may make it hard to resist the urge to act, particularly if people are worried about pending retirement or facing possible unemployment. “It’s really hard to be disciplined during times like this,” Cady said. “But realize that those funds you are putting away are going to be helpful in retirement. That money is really designed to be there for you when you are no longer working.”
“It’s really hard to be disciplined during times like this. But realize that those funds you are putting away are going to be helpful in retirement.” — Amy Cady, Wells Fargo financial advisor
Cady is based in Oklahoma, where the volatile oil industry provides income for many of her clients. She said she has had many recent calls from her clients who are close to retirement.
“We are encouraging them to increase their contributions to 401(k)s because of this volatility and the opportunity in the market,” Cady said. “A lot of the time we see clients who want to reduce their contributions because they see their deposits go in and see balances going down. We remind them that they want to be buying shares that are available at lower prices. So if they are contributing at 6%, increase to maybe 10%, because they are able to buy so many shares with that money — if that is something they can afford to do.”
“With your current contributions, you’re buying shares at these currently lower prices,” Mackie added. “And that could be good for your 401(k).”
The CARES Act (Coronavirus Aid, Relief, and Economic Security) has made terms more flexible for people seeking to take money out of their 401(k) for COVID-related purposes. It provides flexible arrangements for withdrawals and related taxation. But experts caution that such a move should be very carefully considered.
“Anyone who qualifies can now take a distribution from a 401(k) without the penalties,” Cady said. “But you are still subject to federal and state income taxes, so you still will have a tax bill waiting for you.”
Cady and other advisors discourage pulling from a 401(k) unless it’s an absolute necessity. It’s advice that sounds ordinary in these extraordinary times, but she says it still holds true, even for those who are among the millions of people who are suddenly unemployed. She said the preference would be to focus on unemployment benefits while waiting for a return to the workforce, or to look for another job or source of income. Even a 401(k) loan, which advisors normally caution against, she said, could be a better option than going to cash — as long as you can afford the payments on such a loan.
“Each household should really take a look at what makes sense for them. If possible, work with a financial advisor about scenario planning, and figure out the best strategy for accessing funds.” — Amy Cady
“Using money from your 401(k) prematurely can derail the retirement plan,” Cady said. “It is hard to give a blanket statement on this. Each household should really take a look at what makes sense for them. If possible, work with a financial advisor about scenario planning, and figure out the best strategy for accessing funds.”
Waller agreed. “You don’t want to panic and sell out (go to cash),” he said. “If you sell out and you don’t get back into the market, you could miss a major rebound while you’re out, because markets can come back just as fast as they went down. No one can predict the bottom.”
Fear of recession might tempt investors to exit the market entirely, but trying to time the market can be costly. Consider talking to a professional financial advisor or your plan administrator before attempting to enter and exit the market to time upswings and downswings.
In general, experts say no matter how your portfolio is allocated or where you are in life, you should be aware of all available options.
“My only fear with people looking at statements right now is that they may make an emotional decision,” Cady said. “It’s good to be aware of where you are, but I wouldn’t say it’s necessarily a good time to change anything.”
An exception to the look-but-don’t-touch advice, she cautions, may be for retirees who find that their risk tolerance is out of balance with the times.
“Make sure you understand where your risk tolerance is. Make sure balances are aligned with your objectives,” Cady said. “If you are close to retirement, you may want to be a little more aggressive.”
“Make sure you understand where your risk tolerance is. Make sure balances are aligned with your objectives. If you are close to retirement, you may want to be a little more aggressive.” — Amy Cady
Waller reiterated: “It’s important to know what you own. What’s in your mix? Do you know? If you don’t know what you own, you can’t make a solid decision on your portfolio’s performance or its asset allocation.”
What do you do if you find an imbalance? Before making any investment decisions, consider talking to a financial professional for help in determining whether changes are needed based on your investment objectives, risk tolerance, and time horizon: “Each employer has hired a plan administrator to run their 401(k) plan. In that plan, it’s important to look at the entire catalog of 401(k) investment choices and review the long-term returns,” Mackie said.
Advisors suggest that employees go to their plan administrators for additional support and resources, or to better understand the investment choices available.
“It all depends on your individual situation,” Cady said.
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