Inertia and My 401k

in·er·tia [in-ur-shuh, ih-nur-] –noun

1. inertness, esp. with regard to effort, motion, action, and the like; inactivity; sluggishness.
2. Physics. the property of matter by which it retains its state of rest or its velocity along a straight line so long as it is not acted upon by an external force.
3. Medicine/Medical. lack of activity, esp. as applied to a uterus during childbirth when its contractions have decreased or stopped.

As 401k participants everywhere ponder “What should I do with my 401k in this current market” they may want to give some thought to the beneficial aspects of inertia.

Synonymous with “inactivity” and “sluggishness”, inertia is typically viewed as a negative characteristic in the 401k world. Indeed, the push by government and the 401k industry to make 401k’s a truly workable retirement solution has centered on introducing policies specifically designed to counter what we can call “bad” inertia. Examples:

Examples of “Bad” 401k Inertia
Inertia causes workers to fail to enroll in 401k plans, often missing out on company match	Response: automatic enrollment
Inertia keeps workers from increasing contributions as wages rise	Response: automatic contribution arrangement
Inertia at the root of workers opting for low-yield investment options such as money market accounts	Response: automatically place 401k participants in qualified default investment alternatives

But there apparently is a bright side to 401k inertia as well. Some commentators credit employee inaction in the face of the historic market collapse of 2008-09 as the primary reason behind the remarkable recovery of 401k account balances that has occurred in the past year. Relatively few 401k participants reacted to the market turmoil by reducing their 401k contributions or moving account balances from riskier asset classes that were hardest hit into “safer” investments. Doing so, of course, would have been the classic panicked behavior expected of amateur investors: selling at exactly the wrong time.

For whatever reasons, workers by and large stood pat with their 401k’s and were rewarded nicely. By the end of 2009, just 9 months after the market bottomed (DJIA @ 6,443 in March 2009) Fidelity and Vanguard both were reporting that most 401k participants had account balances higher than they did at the market’s peak in October 2007.

“I think the good news is inertia took over and most people did nothing. During the rebound from April (2009) on, the inertia value of the 401k is very good.”
- Jane Bryant Quinn as quoted in Employee Benefit News (4/1/2010)

“What to do with my 401k in this current market?” Consider setting a long-term course with regular 401k contributions, a solid 401k investment portfolio strategy and letting inertia take over from there.