Congress’ 401(k) Tweaks Insulated Plans From Tariff Panic Trades

The Trump administration’s tariffs have triggered panic trading from almost all corners of Wall Street except for one: 401(k) account holders, thanks to new plan design options that Congress gifted employers.

Workplace retirement plan trading as of mid-April is on par with last year’s data, according to Vanguard, which administers plans for more than 5 million Americans. That’s a victory for proponents of a more resilient defined-contribution retirement market who say long-term growth strategies bear out better outcomes for patient investors, especially in tax-advantaged savings vehicles designed for methodical growth.

When Congress added default options to plans and prodded employers to augment their investment menus with more balanced funds, it wanted to set up new plans and encourage more workers to participate.

These moves unintentionally make 401(k)s less susceptible to market turbulence because workers who are automatically enrolled in 401(k)s are more likely to be “set-it-and-forget-it” investors when times are tough. Also, carefully managed investment products like target-date funds, which allocate equity and risk according to a worker’s expected retirement age, shield rookie investors from short-term tariff-related losses.

“As someone who’s been doing this for 28 years, this is a really positive thing to see,” said David Stinnett, a Vanguard principal, who leads the investment firm’s strategic retirement consulting team. “We used to spend a lot of our time trying to convince more people to join the plan and educating people about market basics and asset allocations. We don’t spend as much time doing that now because, when plan designs are set up to default workers in, you have much stronger retirement outcomes and a more resilient industry.”

Although markets have remained somewhat unstable in light of the unknowns, it still isn’t clear how 401(k) participants and their employers would react to a more drawn-out economic slide. Benefit reductions and employer plan contribution suspensions during market slumps caused by the Covid-19 pandemic proved 401(k)s are far from crisis-proof.

Default 401(k)s

The Pension Protection, SECURE, and SECURE 2.0 Acts Congress passed over the last decade made amateur 401(k) investors the outliers in a mass of Wall Street day traders dumping and then buying back shares in response to Trump’s tariff strategy.

Plan providers and consultants say they saw unusually high call volumes when stocks first started to dip. The S&P 500 wiped nearly $2 trillion in value virtually overnight, but panic trading in the 401(k) space was limited, largely confined to older workers with higher balances who are nearing retirement.

For many workers whose workplace retirement accounts are now on auto-pilot, temporary market disruptions are less likely to spur individuals to move their 401(k) cash around out of panic.

Meanwhile, plan sponsors who opt for prepackaged, safe-harbor plans—free from additional compliance burdens—are now authorized to choose diversified target-date funds for workers’ savings. The funds shift assets and gauge risk according to a projected retirement age.

Those “glide-path” strategies make TDFs less susceptible to short-term economic downturns, said Stinnett. When workers and retirees see market turmoil, they’re relieved when they check their own accounts, he added.

“Increasingly, they’re not as bad off as the headlines might suggest, because, if they’re in a target-date retirement fund, they’re not exclusively invested in the US markets,” Stinnett said. “They’re diversified.”

Investment Advice

Congressional action on retirement refocused attention to ancillary benefits, including pocketbook wellness and financial counseling. Employers are now empowered to offer up financial education without treading into financial advice, said Holly Verdeyen, partner and defined contribution business leader at the Mercer consulting firm.

Both the SECURE Acts opened doors for employers to use their 401(k)s to help employees improve their financial health generally, by setting up emergency funds or paying pay down student loans.

“Plan sponsors are designing plans to help in times like these, and they are eager to tell workers that story and why they should feel comfortable just riding this out,” Verdeyen said.

Increasingly automated recordkeepers such as Vanguard and Empower include subtle reminders about long-term retirement strategies that can act as a first-line of defense when participants get uneasy. But ultimately, the fiduciary liability for offering that advice can fall on the employer, not the third-party service provider that provides it, said Matthew Eickman, chief legal officer at the Fiduciary Law Center.

Future Unknowns

Immediately after Trump’s trade war escalation, only about 3% of five million Vanguard 401(k) savers reacted swiftly to try to stabilize their assets, said Stinnett. That’s in line with the 5% of exchanges Vanguard reported for the same timeframe in 2024.

More than 80% of Vanguard 401(k) participants had some of their savings invested in TDFs in 2023, according to a new company report.

Empower CEO Ed Murphy told Bloomberg Market Interest that his recordkeeping firm saw a 30% spike in call volume right after Trump’s April 2 announcement, but that “for the most part, people were just seeking account balance information, maybe looking for advice. Trading activity was pretty de minimis.”

Verdeyen said call centers were equipped and ready to handle the increase in call volume, and the flight to safer stable-value and money-market plans was predominately in “age-appropriate demographics.”

The 90-day tariff pause is set to expire in early July, risking higher import costs if countries haven’t renegotiated trade rates with the US. More ensuing market chaos could do more lasting damage on 401(k) balances than April’s drop.

But recordkeepers and consultants say market volatility isn’t new, and they’re ready to respond.

“Policymakers are designing a system that is making plan sponsors feel good that there are professional hands at the wheel,” Verdeyen said.