401(k) Specialist Issue 3 - 2020 - 9

similarly turbulent time, participants had the tools and
behaved in a way that was to their benefit.
Q: What steps can/should participants take to guard
against emotional reactions to market movements
that could further damage a retirement portfolio?
A: During periods of market volatility, we want to take
control, but we have no control over what's happening in
the market.
From a behavioral finance standpoint, we know that
losses hurt worse more than gains feel good. Loss aversion
is real. One way that loss aversion and this need for control
come together is in selling out of the market immediately
after significant down days. It's their way of feeling like they
have at least some control.
'The reason why you're
invested the way you are
is to take advantage of
your risk capacity and
the fact that you benefit
from time.'
If they habitually do that, we know it can derail their
long-term accumulation of wealth for retirement. That's
primarily because the best days often occur so close to the
worst days. We actually looked to see how best and worst
days occur. What we found is that six of the seven best days
followed the worst days in the last 20 years. If you get out
of the market, you can't get back in with enough time to
benefit from those rebounds.
Q: When " stay the course " is mentioned, does it simply
mean to stay invested, or should other actions be
taken (or not taken) as a result of extreme volatility?
A: We see it as an opportunity to save, revisit your
investment direction, understand why you're invested the
way you are, and remind yourself of your time horizon.
People start to think very short-term when they're
experiencing market volatility. You may not need the
money for 10 or 15 years. The reason why you're invested
the way you are is to take advantage of your risk capacity
and the fact that you benefit from time.
Q: Current COVID-19 crisis aside, why are some
people better savers than others, even at equivalent
income levels?
A: We recently teamed up with the Employee Benefit
Research Institute (EBRI) to study the behavior of high,
middle and low savers.
The result was that middle savers are 12 times more
likely to successfully cross the retirement finish line of
income replacement than the low savers, so that's a really
meaningful difference in terms of outcomes.
The research is groundbreaking in that we're able to see
exactly which spending categories are crowding out the ability
to save-housing, transportation and food/beverage.
What's important is that, for the first time, we're able to
really isolate these three problematic categories. We hope
to help individuals understand that their decisions related
to those categories are areas that they could fine-tune to
free up more money for saving.
Q: What has the decline in defined benefit coverage
and the rise of defined contribution plans meant for
the employer's role in retirement saving?
A: From our research, we would estimate that for a majority
of the 401(k) participants-after you factor in how much
they're saving, taxes, Social Security, etc.-it doesn't really
leave anything else. Our initial conclusion is that the 401(k)
or DC plan is the only area where, at least with middle and
low savers, we can see them actually saving.
We obviously want them to continue saving for retirement,
but during periods like this where people have gaps in
income, if that's their only savings vehicle, they're going
to need to tap it, which derails their long-term retirement
plan. At its core, what we see is just how important it is for
employers to offer 401(k) and DC plans. They're incredibly
important from a benefits perspective.
1 Sarah Holden and Daniel Schrass. " Defined Contribution Plan Participants'
Activities, 2018. " ICI Research Report (May 2019). Available at www.ici.org/
pdf/ppr_18_rec_survey.pdf.
http://www.ici.org/
401(k) Specialist Issue 3 - 2020

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