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‘Stick to the plan’ best advice when market volatility strikes

Despite all the efforts to educate 401(k) plan participants to invest for the long run and to remain calm during market corrections, they may be getting gun shy.

The volatility of the stock market in 2018 seems to have worn out the patience of a significant number of participants as they traded more actively last year than in the past five years.

According to Alight Solutions, which tracks 401(k) plan participant investing behavior, the level of trading in the volatile fourth quarter of 2018 was exceeded only in seven other quarters since 1997. Further, December's trading was the most active for that month in the history of the index, as reported by Pensions & Investments.

The Alight analysis of trading patterns showed assets flowed out of target-date funds, large-cap equity funds and midcap equity funds. Assets flowed into stable value funds, money market funds and bond funds.

Clearly, the participants were weary of the stock market volatility and were looking for stability. Probably many remembered that the 2008-09 bear market cut their 401(k) balances almost in half and did not wish to experience that again. It is time for plan sponsors to reinforce the messages that investing in stocks offers the best long-term returns, that earning those returns requires accepting the volatility that goes along with stock investing, and that market timing — getting out of stocks at the right time and getting back into them at the right time — is very difficult to accomplish.

Most investors get out too late, suffering losses before they do, and then get back in too late, missing potential gains.