Three considerations for navigating participants through uncertainty

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:

1: Gauge participant sensitivity to market volatility

Market volatility can spook even the most experienced investors. It can be beneficial to engage participants to assess how they're responding to volatility.

Take a look at asset flows to get a sense of how participants are reacting. If necessary, work with your investment provider to develop targeted participant communications to help ensure individuals stay invested for their retirement objectives.

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 last 20 years (2003-2023) against the return if top-performing days were missed.

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

12-month performance following major declines

Source: Morningstar. Returns are principal only not including dividends. Stocks are represented by the S&P 500 Index, an unmanaged index that is generally considered representative of the U.S. stock market. Past performance is no guarantee of future results. For illustrative purposes only. It is not possible to invest directly in an index.

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 in retirement.

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.

Many target date funds are designed with hetereogenous participant population in mind. These strategies determine the appropriate asset allocation mix to help investors grow and preserve their retirement savings.

3: Re-examine plan menus for resilience

Whatever your view on the current environment, 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 will your portfolios hold up?
  Stress test your current QDIA or target date fund to various market scenarios. Pay particular attention to core menu exposures: are they providing diversification and are you offering participants access to active management options that can help navigate more turbulent markets?

• 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.
• Have you reviewed your participants' retirement readiness?
  Volatile markets may disrupt participant savings and investing behaviors, which may require a fresh review of plan design.

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

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