The Discerning Investor by Julie Jason

Is COVID-19 Affecting Retirement Savers?

If you are participating in a retirement plan at work, are you changing your activity because of the pandemic? Most participants are not, even though the COVID-19 market was a roller coaster between Feb. 19 and March 23. One-day declines and advances in the S&P 500 index made it to the top 25 list of biggest up and down days since the Great Depression.

Nonetheless, only 2.2% of retirement plan participants (401(k)s and other defined contribution plans) stopped contributing to their plans in the first three quarters of 2020, according to the Investment Company Institute (ICI), a major trade association that represents the regulated investment fund industry. That compares with 5% during the first three quarters of 2009, just before the end of the financial crisis market that started in October 2007 and ended in March 2009.

“Americans overwhelmingly continued saving for retirement through defined contribution (DC) plans during the first three quarters of 2020, undeterred by the economic downturn brought about by the COVID-19 pandemic,” according to ICI.

This conclusion is based on ICI’s “Defined Contribution Plan Participants’ Activities, First Three Quarters of 2020” study released Nov 19. The study involved tracking record-keeper data for more than 30 million retirement plan participants (401(k) and DC plans).

What’s important about the data is that it shows participants are not reacting to the tremendously volatile time between Feb. 19 and March 23, the one-month period that created the shortest bear market measured by S&P Capital IQ. The S&P 500 index started this short period at 3,386 (Feb. 19) and ended on March 23 at 2,237, with a loss of 33.9%.

Since 1929, the average bear declined about 38%, lasted 489 calendar days and took 42 months to break even. If you start the count in 1946, the average bear declined about 33%, lasted 389 calendar days and took 24 months to recover. The COVID-19 bear lasted 33 calendar days, declined about 34% and took only five months to recover. But, what a ride we experienced during that time: a decline of 12% on 3/16/2020; a decline of 9.5% on 3/12/2020; and a 7.6% decline on 3/09/2020, landing these three in the worst 25 list of daily declines since the late 1920s, according to Sam Stovall, chief investment strategist at CFRA, an independent investment research firm. Two up days made the top 25 list of biggest daily advances: 3/13/2020 (+9.3%) and 3/24/2020 (+9.4%).

For context, 401(k) participants represent a huge demographic -- we’re talking about millions (58 million) of active 401(k) participants and millions more former employees and retirees, according to ICI. And, importantly, they are thinking ahead. As they should.

“The data again show the long-term mindset of retirement savers,” said Sarah Holden, ICI senior director of retirement and investor research. “Even in a year of unprecedented economic volatility and increased financial hardship, savers clearly view their DC account as a special pot of money earmarked for retirement, which is only tapped as a last resort. Retirement savers consistently demonstrate that they are in it for the long haul and tend to stay the course.”

Music to my ears: As a proponent of financial literacy education, that’s very good news to me.

ICI has been tracking DC plan participant activity through record-keeper surveys since 2008. This update provides results from ICI’s survey of a cross section of record-keeping firms representing a broad range of DC plans. Visit ICI’s 401(k) Resource Center (ici.org/401k) for more information, and you can read the ICI research report at tinyurl.com/yyocu579.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION