Target-date funds played a big part in helping defined contribution (DC) plan participants stay invested through February’s market turmoil. And history does repeat: in the severe 2008–09 financial crisis, these funds kept many participants positioned to take part in a lengthy bull market.
Keeping Investors on Course in February’s Sell-Off
In early February of this year, equity markets suddenly tumbled and volatility reawakened.
It was the first big disruption in a while, and some—albeit a small overall percentage of—worried investors quickly made changes to their 401(k) allocations. Trading was higher than average, but was almost exclusively limited to individual equity funds, as investors tried to reduce exposure.
But the percentage of overall assets in motion was actually very low. This means that target-date funds were a big factor in helping participants stay the course and avoid overreacting emotionally. In other words, these funds reinforced a much better, disciplined approach to long-term retirement investing.
The Global Financial Crisis: A History Lesson
This reinforcement likely paid big benefits for many participants in an earlier and much more disruptive period—the financial crisis of 2008–2009.
Even with markets reeling and the US economy moving into recession, industry statistics show that DC plan participants for the most part stayed fully invested, with only a small percentage of them changing their equity allocations.