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4th Quarter Fallout: Mistakes 401k Participant Might Make After Reading Their Latest Statement

4th Quarter Fallout: Mistakes 401k Participant Might Make After Reading Their Latest Statement
January 29
00:03 2019

That markets might be having a typically January, but 401k savers could be trapped in the past. The fourth quarter of 2018 witnessed a market downturn of the likes we haven’t seen in some time. When plan participants open they’re year-end statements, they may experience sticker shock. How they react to that may spell the difference between a comfortable retirement and an anxious one.

The 4th quarter devastated the markets. All the major indices lost in excess of double digits in only three months. The average mutual fund category fared no better, and in some cases much worse (the Morningstar Small Growth average dropped 21.44% – and that was just the average fund!). When employees see their losses, they may decide to “fix” the “problem.” This could be the worst mistake they can make regarding their retirement. Let’s look at those perceived problems and offer the more appropriate fix.

Problem: Can’t Handle Short-Term Downside Returns; Fix: Don’t Open Those Statements
We’re going to see variations on this them throughout this article. People generally aren’t dispassionate when it comes to their investments. It’s really only a bunch of numbers. There’s nothing emotional about numbers. But people are human, and humans aren’t machines. They have emotions. And sometimes those emotions lead to harmful decisions, like “going from stocks to cash,” says Charlie Epstein, Founder and CEO, Epstein Financial Services and The 401k Coach in East Longmeadow, Massachusetts. He suggests people who can’t handle the volatility simply “stop listening to and watching the news! Go about your daily business.”

“Going ostrich” worked following the 2008/2009 market debacle. It turned out the people who decided not to open their statements recovered faster than the people who did open their statements and decided to switch to “safe investments.” This was due to the phenomenon known as “myopic loss aversion.” It’s not volatility (which includes the ups as well as the downs) which depresses people. It’s just the losses. “The shortsightedness of plan participants is a greater risk than short-term market volatility,” says Matt Fleck, Vice President at Axia Advisory in Indianapolis, Indiana. “Participants need to turn off the news and remind themselves that volatility is a not a four-letter word. The recent selloff is a normal and healthy part of any market cycle and any changes to your investment allocation should have been made before the volatility appeared.”

Problem: Assuming Action is Necessary; Fix: Do Nothing
OK, so there are those who think they have to open their statements. If that’s the case, then they’ll have to control the urge to “do something.” The best way for them to understand they should do nothing requires the fully understand the course they have laid out. Sure, sometimes you need a course correction, but more often you don’t. “When talking to plan participants,” says Jamie Hopkins, Director of Retirement Research at Carson Group in Omaha, Nebraska, “make sure they understand why they are invested the way they are invested and that investments are long-term strategies. Short-term volatility should not cause you to overreact and explaining the overall goals and strategy can be a great way for an adviser to add value to a client.”

Passions routinely lead to bad decisions. Retirement savers must control their passions. They must possess the discipline to sit quietly when everything in their heart (not their brain) tells them they must act. “The single worst decision someone who is saving and investing for retirement can make in a period of sustained market volatility is to make emotional decisions with their investments and savings,” says Lloyd A. Sacks, Managing Director, Sacks & Associates Wealth Management, Bridgewater, New Jersey. “It is generally very easy to get scared out of a position, and emotions can override rational reasoning, common sense, and the logic that we used to make the investment decisions in the first place. I am always reminded of what Darcy Howe, a VP with Merrill Lynch, once famously stated about investing: ‘I’ve always felt that investing is like a bar of soap. The more you handle it, the smaller it gets.’”

Problem: Assuming the Wrong Action is Necessary; Fix: Learning the Right Action
The fact is, professional investors are always prepared to make moves, no matter what the market happens to be delivering. That means there are correct moves to make when the market is going up, and correct moves to make when the market is going down. It’s just that, most employees don’t have the time to learn those correct moves. Without education, they allow their natural behavior to control their decision-making process, and that generally doesn’t result in the right move. “The wrong move to make would be going super conservative and moving everything into stable value/money market type investments,” says Justin Goldstein, Director & Principal of Plan Advisory Services at Bronfman Rothschild Plan Advisors in Madison, Wisconsin.

The trouble is this “wrong” move can feel right immediately after making it. It doesn’t take long, however, for buyer’s remorse to set in. “While that may shield them a bit on the way down, participants that do this are typically very bad about putting their money back to work into equities and end up missing out on the upswing as the market corrects,” says Goldstein. “This leads to underperformance over time. The same is true for plans that used to have the stable value or money market fund as the default fund in their plan. Participants typically think that a default position is recommended, so they never change it, and again end up sitting in cash for long periods of time missing out on market growth. A good way to prevent this is to attend whatever type of employee education your company offers to plan participants, or to reach out to the plan’s advisor or recordkeeper for their thoughts on how to best position their dollars.”

Problem: Stocks are Losing Money; Fix: Stocks are On Sale
Here’s where education can really help. It actually makes use of a behavioral finance technique known as “framing.” This refers to changing the perspective on how you look at things. This is the same marvel that allows different people to see the same data and come up with two totally contradictory explanations for it. Think of it as an optical illusion. The same picture contains two different images. What’s the crazy things about optical illusions? You’ll insist the picture contains only one image. That is, until someone shows you the other image – then you can’t get that second image out of you might.

That’s the nature of the fix here. And it’s all based on our old friend dollar cost averaging. It all starts with taking on that same familiar foe we’ve seen earlier. “Don’t let emotions drive the investment decision,” says Scott K. Laue, a Financial Advisor at Savant Capital Management, Rockford, Illinois. “It’s challenging to remove the noise from the equation and ask yourself what, if anything has fundamentally changed. Remember with systematic payroll contributions if the markets are down a participant buys more shares with the same dollar contribution amount and if the market is up that day they buy less. This dollar cost averaging strategy tends to give a great chance for success over time.”

Reframing occurs when you liken the drop in the markets to a rare sale at your favorite retailers. This requires plan participants to embrace where they are in terms of being the consumer. “One of the main points retirement plan investors who are not very close to retirement must realize is that they are buyers, not sellers,” says Patrick M. Foley, co-author of the book Winning at Retirement and Senior Vice President with Baird in Blue Bell, Pennsylvania. “They won’t become sellers until retirement. Downside volatility means stocks are on sale, and that’s a good thing for buyers. The theoretical ideal for someone buying into a retirement plan is for the market to be absolutely abysmal for the entire time they are working and saving, and then for it to rise steadily after they retire. If you can get someone to view it from that perspective, volatility becomes much less of a concern.”

Problem: Reacting; Fix: Proacting
Again, emotions drive you to zig when you should zag. To do this right, retirement savers need to be trained to look for times to zig when the rest of the world is zagging. Again, we’re overcoming the emotional need to do act in ways that aren’t in the best interests of obtaining a comfortable retirement. “The wrong move is to overreact to shifting investor sentiment and to sell into weakness,” says Andrew Kenney, Chief Investment Officer for Delaware Life in Waltham, Massachusetts. “Volatility creates opportunity, particularly for those with the right liability structure, to re-enter certain sectors at more attractive valuations.”

One way to achieve this is by setting a regular time to revisit the investment make-up to insure your target allocations are maintained. “The wrong move is to make reactionary allocation changes,” says Mark Painter, founder of EverGuide Financial Group in Berkeley Heights, New Jersey. “The natural reaction is to add risk when things are going up and reduce risk when things are going down. While this may feel good at the time, it can be detrimental to long term returns which are helped with buy low and sell high. Periodic rebalancing regardless of market conditions will help smooth out and generate better returns over time.”

Problem: Thinking you can “Do-It-Yourself”; Fix: Go On Autopilot
Of course, if we’re talking about maintaining the allocation in a disciplined manner, the best was to accomplish this is for retirement savers to admit they can’t do it themselves. Why? Because they can’t keep their heads in the market 24/7. In most cases, they can’t control their behavior, and will common traps like “selling assets after they fell in price,” says Davey Quinn, SVP of Investment Management at United Income in Washington, D.C. “The behavior gap measures the return that investors actually experience vs. the returns if they made no transactions, and this gap is almost always negative meaning investors are their own worst enemies. The best way to prevent the behavior gap is to select an investment option that is automatically managed for you and aligns with your risk appetite, then limit how often you look at statements.” Does this last part ring a bell?

Obviously, the way we see people doing this now is through their default investment options, usually a target date fund. TDFs help keep employees from taking actions that can destroy their retirement. “The most frequent decision that retirement savers make, perhaps incorrectly, is to react to recent market performance and make changes after the fact,” says Joe Arena, Chief Investment Officer at Quartz Partners Investment Management in Troy, New York. “Using options such as TDFs can help investors avoid this mistake, although TDF investors should periodically review any changes their provider may have made to the TDF’s methodology to determine whether it remains suitable for their individual preferences.”

When it comes to investment, nothing can guarantee future results. But we do have a volume of studies that appear to indicate how to avoid making decisions that leave one exposed to the worst potential outcomes. And those decisions are most likely to occur after 401k plan participants open their 4th quarter 2018 statements.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Jack Towarnicky
    Jack Towarnicky January 30, 09:33

    Chris, in my last plan sponsor role, I encountered this at least three different ways:
    – 2008, many ignored (ostrich) their statements,
    – Year-end 1987, we had some market recovery after Black Monday – largest one day percentage decline – most took the decline in stride, learned a lesson,
    – 3rd Qtr 1986 – When I made the shift from annual to quarterly 401k statements, 3rd Qtr 1986, it was in a quarter with a modest equity market decline and a slight rise in interest rates, I failed to prepare workers for the first time in the 18 year history of the plan where the statement would have a minus sign. Too many reacted negatively and made the mistake of transferring out of equities.

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