The Covid-19 pandemic, which has wreaked havoc on the global economy, is the worst blow to the economy since the financial crisis of 2008 and 2009. And those memories serve as a good lesson for defined contribution participants today, according to a research paper by Katherine Roy, J.P. Morgan’s chief retirement strategist.

With the S&P 500 recently touching levels 30% below its February 19 peak, and its best and worst days over a 20-year window occurring within weeks or even days of each other, Roy said the lesson participants, their advisors and plan sponsors can take from the 2008-09 crisis is to stay the course.

At the start of that crisis a little over a decade ago, markets dropped as much as 49% and volatility hit an all-time high, Roy said in the paper, "DC Participant Behavior in Volatile Times." But rather than panic and act on their emotions, most participants allowed their defined contribution plans to do the job they were meant to do: Encourage early and regular contributions, discourage market timing and let dollar-cost averaging work for them.

She cited a study by Investment Company Institute that showed that in 2008 and 2009, almost 97% of participants continued making contributions. Wthdrawal behaviors generally did not increase; and more than 85% of participants did not make an investment change. By 2010, the total value of assets in participant accounts had recovered, she noted.

Roy explained that consistent contributions help participants stay on track to accumulate the assets they will need in retirement. “And with dollar-cost averaging, buying more shares with a given contribution amount as prices decline can potentially help when markets bounce back,” she said.

She also warned against trying to time the market, especially in volatile periods. A participant who stayed fully invested in the S&P 500 over 20 years through the end of 2019 would have earned more than 6% annually versus less than 3% for those who missed just 10 of the days with the highest daily returns, she said. Recent volatility has made it even more difficult, if not impossible, to avoid the worst days and benefit from the bes, she added.

Depending on factors such as a participant's financial well-being, age and portfolio positioning going into the downturn, Roy said the current environment can serve as a teachable moment and a time to reinforce good behaviors for the long term.

Advisors and plan sponsors should encourage participants to contribute consistently at a level that allows them to maximize any employer match and build an emergency fund, she said.

She also offered advisors the following suggestions for portfolio management:

• Maintain a diversified portfolio allocation that reflects participants' capacity for risk based on their savings and withdrawal behaviors and target date for retirement—recognizing that risk level should generally decline as they approach that target date;
• Rebalance routinely.
• Invest in professionally managed solutions such as target date funds that are diversified and periodically rebalanced to keep participants on track.

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