Market volatility: 3 actions for plan sponsors

BlackRock |Apr 8, 2021

Volatility is a fact of investing life – but market turmoil on a large scale can raise concerns among even the most battle-hardened investors about long-term market trends and impacts.

When volatility strikes, here are three action steps that plan sponsors may want to consider:

Action 1: Speak to your participants!

It’s a good bet that participants are worried – especially those without a great deal of investment experience. Reaching out proactively may help prevent nervous participants from making damaging mistakes by pulling out of the market.

Here are talking points you may want to consider:

  1. Reassure participants invested in a target date fund or similar qualified default investment alternative (QDIA) that it is designed for the long-term with periods of market volatility in mind.
  2. Remind participants in target date funds that they are designed to provide age-appropriate exposure, with reduced exposure to equities for older and retired participants.
  3. Pulling out of the market and missing a potential rebound can be costly. There are a number of ways to illustrate this, but the following chart makes a good case.

Missing top-performing days can hurt your return

Compares hypothetical return of $100,000 invested in the S&P 500 Index over the 20 year period from (3/1/2000 to 2/28/2020) against the return if the 10 and 25 top-performing days were missed.

Potential rebound can be costly

Past performance does not guarantee or indicate future results. Source: BlackRock, Bloomberg, Morningstar as of 2/28/2020

The following table illustrate that performance after selloffs is often very strong: 

12-month performance following major declines

S&P 500 biggest declines Black Monday 8/25/87-12/4/87 Gulf War 7/16/90-10/11/90 Asia Crisis 7/17/98-9/31/98 Tech Bubble 3/27/00-10/9/02 Financial Crisis 10/9/07 -3/9/09 US Credit Downgrade 3/10/11–10/3/11 Trade War 10/3/18-12/24/18
% decline -33.5% -19.9% -19.3% -49.0% -56.8% -19.0% -19.6%
Next 12 months +21.4% +29.1% +37.9% +33.7% +68.6% +32.0% +37.1%

Source: Morningstar as of 2/28/20. Returns are principal only not including dividends. U.S. stocks represented by the S&P 500 Index. Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You can’t invest directly in an index.

Action 2: Keep the whole lifecycle in view

Short-term market events can block our vision of the long term. The purpose of a defined contribution plan may remain the same, regardless of a participant's age: to grow their savings enough so that it may help support their lifestyle after the paycheck stop.

Yet while the goal may be the same for all participants, their needs may depend on where they are in their career. Participants in, or near, retirement want market growth to help fund potentially decades of retirement, but they also want to mitigate losses that could derail their retirement plans or spending. Younger participants have more time to recover from volatility – and more time to contribute savings.

LifePath® target date funds are designed with a heterogeneous participant population in mind. The franchise has navigated more stock market declines and recoveries than any other target date fund. It seeks to help investors grow and preserve their retirement savings by carefully managing risk. One of LifePath’s primary goals is to manage investments as retirement nears to help keep savings on track.

The target date in the name of the fund is the approximate date when an investor plans to start withdrawing money. Target date funds are invested mainly in U.S. and global stocks early on, shifting to more conservative investments, such as bonds, as investors get closer to retirement.

Action 3: Respond to volatility before it happens

Whatever your view on the current market, we expect participants to face bulls and bears throughout their career and retirement. We can’t say when, but we will see severe volatility again. Now is the time to prepare for the next round by considering the following questions:

  • How well do you know your participants?
    How they respond to volatility may be more important than the volatility itself. Take a look at asset flows to get a sense of how participants reacted. If necessary, develop a participant communication protocol so that you’re ready the next time.
  • Do you know how your participants are invested?
    A well-diversified, age-appropriate QDIA can only benefit participants who are invested in them. Allocations for many participants may have greater risk exposure than you may assume.
  • How will your portfolios hold up?
    Stress test your current QDIA or target date fund to various market scenarios. Pay particular attention to fixed-income exposures: are they providing ballast for equities, or does credit exposure compound equity-like risk?
  • Have you developed a long-range forecast?
    Either independently or by working with your provider, explore long-term market expectations and consider their impact on participant retirement outcomes. BlackRock plan design analytics can help you review changes in the investment allocation or plan design enhancements to help identify potential improvements or exposures.

Speak to your BlackRock representative if you want to explore any of these issues.

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