Not familair with what options available in 88 700 series but it sounds like the tranny is a retrofit. I thought Volvo went with the M47 (in tranny OD) in 87.

Anyway, an attempt: Sounds like an electrical cause. Where the problem resides is the question.

If it was retro fit, what year M46 was installed? If prior to 1981, your problem would most likely be the 4th gear switch top right tranny cover. This is most likely if you have to keep the wires together for OD.

If a later realy control system was properly installed, the dash light would go off if the 4th gear switch was faulty. At that point, look for a loose wire or poor connection in the wires under the auto to the solenoid. Pay attention to the crimp point at the terminal to wire. I have seen the wires break but not the insulation. Wires underneath getting blown around in the wind then cause all sorts of issues with a not readily visible cause.

With OD light on, under auto wiggle wires and connections. Any action that causes the solenoid to click is a problem area. No need for the engine running. Just ignition on and in 4th.

Duane