Communicating Stock Market Volatility

It is easy to sit back and watch 401(k) plan savings grow when investments are going well. But even the most seasoned investors feel uneasy when the stock market drops.

Historical data shows that stock market volatility is typical of retirement investing. Communicating about volatility can ease retirement plan participants’ fears, help them understand long-term investment strategies and increase their retirement security.

Understanding volatility

The investment management firm BlackRock says market volatility occurs when prices fluctuate significantly. According to American Century Investments, the top causes of volatility include:

• Economic concerns
• Central bank policies
• Global conflicts
• Political turmoil
• Natural disasters
• Corporate scandals

When stock market volatility causes sharp losses, plan participants may make rash decisions that adversely affect their retirement outcomes.

The retirement benefits resource PLANSPONSOR recommends regularly communicating with plan participants about stock market volatility. Consistent outreach prepares them for inevitable downturns. It can also help them avoid overreacting to market dips when they occur.

In addition to year-round education, BlackRock recommends the following communication strategies:

• Actively engage participants during market disruptions and downturns. Acknowledge their emotions and fears.
• Reassure participants that target-date funds and other qualified default investment alternatives are built to withstand volatility for long-term gains.
• Remind employees about risk-appropriate and age-appropriate investment strategies.
• Educate employees on the risk of missing stock market rebounds.

This last point can prevent plan participants from trying to time the market. When participants sell stocks in a downturn, they often miss out on the gains that follow market drops.

BlackRock offers a hypothetical scenario in which $100,000 is invested in the S&P 500 index over a recent 20-year stretch. If plan participants stayed invested throughout, they would end up with $647,854 after 20 years.

However, timing the market incorrectly can drastically reduce investment outcomes. If participants missed five of the S&P’s top-performing days, their 20-year figure would drop to $409,182. If they missed 25 top-performing days – less than a month over two decades of investing – the outcome would only be $143,469.

Written communications and oral presentations should highlight these disparities. Charts and infographics can also help participants visualize the drastic differences.

The industry news source PLANADVISER reinforced the point about mistiming: Over a 20-year period, six of the best stock market days took place within 10 days of the worst.

Similarly, it helps to understand how ups and downs can average out. According to PLANADVISER, the S&P 500 index averaged a 9.8% annualized return over 90 years. But only six of those years saw gains between 5% and 10%. This figure demonstrates that volatility is the norm, and investors can still enjoy long-term gains.

Targeted communication strategies

BlackRock recommends targeting communications to help investors make informed decisions regarding their age and financial position.

Some plan participants reallocate money to safer investments with lower returns during volatile markets. But for younger investors, this strategy can jeopardize the long-term gains they need for investment growth and retirement security.

Plan participants can afford to be patient when retirement is years or decades away. Educating employees on their expected time in the workforce and longevity can help them identify appropriate risk strategies to make their money last longer.

Plan participants nearing retirement are understandably more concerned about volatility. A bad year in the stock market shortly before retirement can affect their short- and long-term income and investment gains. But experts also caution that many people retiring in the next year or two still need to fund 20 to 30 years of retirement. Stock market growth in retirement may be essential to their goals.

PLANADVISER recommends educating near-retirees about emergency savings and liquid assets to cover short-term needs and still take advantage of long-term stock market gains. Participants may benefit from information on managed accounts, automatic rebalancing of equities and fixed-income assets, and lower-risk investments.

Participants of all ages should identify an investment strategy that aligns with their risk tolerance and retirement goals. Encourage them to stick with individual strategies through good times and bad.

Connect employees to objective financial advice and resources. PLANSPONSOR notes that retirement plan recordkeepers can send automatic messages reminding participants to focus on long-term goals. These automatic messages may be triggered by sudden stock market downturns or when individuals call to change their asset allocations. Messages should encourage participants to focus on long-term outcomes and connect them to vetted resources for more information.

Use various communication formats. Ideas include:

• Emails
• Text and voice messages
• Social media posts
• Printed handouts
• Expert videos
• In-person presentations
• Retiree testimonials
• Employee champions

PLANSPONSOR advises organizations to test messaging by tracking engagement stats and soliciting employee feedback. Participants must trust the messaging as they deal with investment ups and downs. Trust is crucial to manage fear during times of extreme volatility.

For more information on retirement plan design, strategies and communications, talk to your Bender Adviser. They can help you protect plan participants by preparing information and education on stock market volatility.