Target-Date Funds Helped Savers Weather Q1 Volatility

Retirement plan participants are staying on track, not changing allocations, in the face of market volatility.

The prevalence of professionally managed target-date funds may have helped retirement savers weather first-quarter market volatility and not change their 401(k) allocations, data from Fidelity Investments’ Q1 2022 retirement trend analysis shows.

Fidelity’s report finds that 5.6% of 401(k) savers did make a change to allocations in their 401(k) in Q1. That is slightly higher than the 5.3% who made a change in Q4 but lower than the 6.4% of savers who made allocation changes in Q1 2021.

“What we found encouraging about this quarter’s analysis was that despite the fact that there was a lot of market volatility in first quarter, we found that most retirement savers did not make any significant changes to their retirement savings accounts,” explains Mike Shamrell, vice president for thought leadership at Fidelity. “We didn’t see a lot of knee-jerk reactions to the market events, and we think that’s attributable in part to the fact that we encourage people to take a long-term view to their retirement savings.”

The Fidelity figures are for the period through March 31, and therefore did not capture the market volatility that occurred in April and May.

Among 401(k) participants who made a change to their allocations in Q1, 82% made one change; for 403(b) participants only 4.4% made a change, the same as in Q4 2021; and among 403(b) savers who changed allocations in Q1, 87% made one change, Fidelity finds.  

In addition to savers taking the long-term view, Shamrell says, retirement plan participants likely did not alter allocations because their savings are held in professionally managed target-date funds. Fidelity data shows that at the end of Q1, 58.2% of participants on Fidelity’s 401(k) platform had their entire savings in a TDF.

“We try to stress that it’s important not to manage your savings based on short-term economic events, but instead take a long-term strategic view and plan any changes for the long term,” Shamrell says. “Within a target-date fund your allocation is being professionally managed and will gradually become more conservative as you approach retirement, so the fact that people knew that their allocation was being managed within a target-date fund contributed to the fact that they didn’t feel the need to go in and make any changes.”

Fidelity finds that among participants under age 25 who are invested in TDFs, 85% had their entire 401(k) savings in a TDF as of Q1.

Shamrell explains that plan sponsors can help participants remain on track for retirement with robust messaging. For example, plan sponsors can urge participants to take full advantage of the company match, stay the course and take the long-term view.

Shamrell adds that there are also steps plan sponsors can encourage participants to take.

“If [savers] want to take some sort of action, number one would be to take a look at whether or not your life situation has changed and whether or not that requires some sort of a shift to your allocation,” he says. “Instead of changing your allocation based on short-term market events,” he urges savers to consider the question, “have you experienced a life event?”

Getting married, having a child and buying or selling a house are all “things that could influence whether or not you want to make a change to your allocation,” Shamrell says.