Helping DC plan sponsors prepare participants for troubled markets

The dizzying 1600-point intraday drop in the Dow Jones Industrial Average that occurred on Feb. 5, 2018, served as a clear reminder that investing isn’t always smooth sailing. The recent October 2018 dip in the stock market, which caused the S&P 500® Index to drop 6.4% by mid-October before seeing a corrective bounce, also helped rattle nerves. But unlike the two-year bear market that began in the fall of 2007, when the S&P 500 index bottomed out at 55.3% of its previous high, both jolts seemed to be short-lived market corrections.

Even so, on that single day in February 2018, participants in employer-sponsored plans traded at 12 times their normal rate.1 That kind of participant reaction demonstrates that even brief bouts of market volatility can lead some retirement investors to overreact, often to the detriment of their long-term goals.

In light of increasing market volatility, it may be time to address this with plan sponsors. Are your plan-sponsor clients prepared to help participants ride out sudden downturns — or even an abrupt end to the bull market? Don’t wait for panic to set in before taking action.

While the catalysts for market downturns may vary with events or economic conditions, the key messages to help plan participants weather those dips rarely change. Why not work with plan sponsors now to create communications programs that can be deployed at the first sign of trouble?

It can also serve as a good time to review investment lineups, especially to check if they include sufficient active components, which can offer better defense in market downturns.

Planning communications for a down market — even when the market is up

To grab participants’ attention at a time when their emotions may be running high, plan to target market volatility communications to their specific situations. By analyzing employee demographics and investing behavior, you can organize participants into segments with shared needs and concerns, letting you tailor meaningful messages just for them.

Following are some sample participant segments, along with suggested custom messages for your clients’ participant communications programs:

Millennials in a target-date fund (TDF)

  • Millennials, who came of age during the global financial crisis, tend to be more conservative than previous generations at the same age. They hold just 28% of their financial assets in stocks and 52% in cash, which doesn’t bode well for the long-term growth they’ll need. 2 The messages for them can be quite different from those you’ll provide to under-saved older participants who may be trying to make up for lost ground with overly aggressive allocations.

  • The message to those invested in a TDF can be as simple as pointing out that a target-date investment automatically diversifies to help manage risk and keeps the proportion of stocks and bonds aligned to years remaining to retirement.

  • Messages to millennials can also focus more on saving rather than market returns. They can point out that when the market is down, investing consistently and tuning out the noise can help. And most importantly -- time is on the side of a young investor.

Participants who have suspended or reduced contributions

  • For those who have stopped saving in a DC plan by suspending or cutting back on plan contributions, the important message is that sitting out the market can be a costly mistake because no one can predict when to jump back in.

  • One example to convey: If you had invested $10,000 in the S&P 500 Index in January 1991 and stayed fully invested through all the ups and downs of the market, it would have been worth $103,951 at the end of 2015. But if you’d missed just the best 25 days of the market over that time, you’d be left with a paltry $26,137. You would have lost $77,814 by trying to time the market. 3

  • Another point to convey is the importance of investing systematically. For example, when stock prices are down, that means a participant can buy more with the same contribution amount. This group should be encouraged to contribute at least enough to get the match. The message: Don’t leave “free” money on the table.

Employees nearing retirement

  • For those within a few years of retirement, market downturns can be nerve wracking. But an important message is: As long as you don’t sell, you haven’t realized any losses. The average market correction lasts just three or four months. 4

  • Even for those nearing retirement, a message should be about the many investing years that still lie ahead. The average 65-year-old man can expect to live for nearly 20 more years, and on average a 65-year-old woman can expect to live another 22 years. Some live much longer — one in four 65-year-olds will live past age 95. 5

  • Planning to keep money in stocks, especially close to and early in retirement, can help generate the growth needed to stay ahead of inflation and help make money last a lifetime. This group should hear a message about balancing the stock portion of a portfolio with more conservative investments to draw on in the short term, and about discussing the right investment mix with an advisor.

Serial loan takers

  • Those who consistently borrow from their 401(k) plans risk jeopardizing their future retirement, but borrowing money during a market downturn could do special harm. The targeted message for this group would be to alert them about the opportunity costs of having money out of the market when it goes back up, potentially leading to loss of returns.

  • It should be pointed out that paying a loan back after a market rebound would essentially be buying it back at a higher cost. That means they would have to save more just to stay even with a pre-loan balance.

  • Consistent investing as the key to reaching long-term goals is another important message for this group. Include tips such as creating an emergency fund to help avoid raiding long-term savings, or putting away a little at a time in an interest-bearing account or money market fund to reach the equivalent of six months’ salary.

Jumping in and out of the market may come at a cost

Average annual total return of the S&P 500 Index, 20 years ending Dec. 31, 2017

cost of jumping in and out of market graph

Source: S&P 500 Index, based on 20 years of index returns, for periods ending Dec. 31, 2017. Past performance does not guarantee future results.

Some plan participants may think they need to move nimbly in and out of the market when volatility strikes. However, taking money out during declines and trying to catch the market back on the upswing has often been a losing proposition. A look at S&P 500 Index returns over 20 years shows that missing the 40 best days would have meant a loss, while staying put would have resulted in a 7.20% gain.

Delivering the messages takes planning, too

How you and your plan sponsors deliver the messages to participants requires some planning as well. Consider email, the organization’s intranet, and even texts to get messages out quickly, and make sure your clients’ email and mobile phone lists are up to date. You may also want to plan group and individual meetings, particularly for those participants nearing retirement. One medium that has been highly effective with millennials is video — consider brief video clips delivered on a platform such as YouTube or other mobile technology that resonates with younger employees.

Market volatility: A time to consider active plan investments

While planning for communications in the event of market volatility, considering participants’ reactions may also make it a good time to review the plan’s investment lineup with sponsor clients. A sharp market decline may especially concern participants who are mostly invested in passive options and would see their plan account follow a benchmark-driven investment during a downturn. Some plan sponsors may find that more of their participants than realized would prefer the flexibility of active management.

This concern could be a good reason to revisit the plan lineup and ensure it hasn’t curtailed actively managed investment options, with their potential to manage downside risk in difficult markets. A review of the plan’s investments can help make sure it includes a balance of both active and passive investment choices that meets the needs of the employee demographics, risk profiles, and investing behaviors.

Your clients rely on your expertise to ensure their investment lineup provides appropriate choices for their employees in all market conditions. And they need your guidance on managing participants’ expectations and emotions that can derail disciplined investing behavior. Schedule your conversations now.


(FOOTNOTES)

1 Ignites, “Market Dive Sparks Surge in 401(k) Trading,” Feb. 9, 2018.

2 UBS Wealth Management, 2014.

3 Forester Financial proprietary research.

4 Investopedia.

5 Social Security Administration.


IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

The views expressed represent the Manager's assessment of the market environment as of November 2018, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market.

Indices are unmanaged, and one cannot invest directly in an index.

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