As was the case in early 2020, the markets are again highly volatile. This June, the S&P 500 Index officially entered a bear market. Quarterly statements for participants’ 401(k) accounts will show significant “losses.” Even though those losses are unrealized and will likely be restored by gains in the future, many participants lack the context and experience to understand that bear markets happen and that there are recoveries. Similarly, plan sponsors may be concerned about the performance of the investments in their plans and will question whether they need to make changes. Fortunately, financial professionals have the experience to understand that market fluctuations are part of normal and repeating patterns and, with that knowledge, to help plan sponsors and participants through turbulent market times.

This article offers ideas for financial professionals to help plan sponsors fulfill their fiduciary responsibilities and embrace best practices during the market turbulence.

• Investing for Retirement: A starting point is reminding plan sponsors and participants that the investment objective is to build a nest egg for retirement. For most participants the focus should be on where the markets will be 10, 20, 30, or even 40 years from now. In the short term there will be bear and bull markets, but viewed from a retirement perspective, the goal is to capture, over decades, the growth of the US and global economies. When market fluctuations are viewed in terms of decades, bear markets become small zigs and zags on the chart. That’s not to diminish the real concerns that participants have, but it is to provide context to what is happening today.

The purpose of the plan is to provide retirement benefits many years in the future and that down markets happen on the journey of retirement saving and investing.

• Communication with Participants: Plan sponsors should consider letting participants know that they are aware of the market fluctuations and regularly monitor the plan’s investments. Sometimes it helps participants to know that the employer is aware of their concerns and is attentive to the matter. Also, committees should work with their providers to send communications to participants about market volatility and the importance of a long-term perspective. It’s important to remind participants that the purpose of the plan is to provide retirement benefits many years in the future and down markets happen on the journey of retirement saving and investing. 

For smaller employers, consider meeting with the participants to discuss the market drop and to put it into context. For all employers, consider webinars, video conferences, or podcasts for participants. These services show participants that their employers are aware of the events and are concerned about their wellbeing.

• Coordinate with other Service Providers: Other service providers, for example, recordkeepers, may also have services or materials that can be helpful to plan sponsors and participants. For example, most recordkeepers have call centers with personnel who are trained to talk to participants in disruptive markets. Find out what the recordkeeper’s call center offers and, if it makes sense, suggest to plan sponsors that they communicate with their participants about the availability of those services and how to access them. In addition, many recordkeepers have written materials for participants that can help them understand that market volatility occurs on a regular basis and that investing should be viewed with an eye on the long-term retirement horizon.

• Meet with the Plan Sponsor: Many plans, and especially mid-sized and larger plans, have plan committees that make the investment decisions. Smaller plans may have a single owner or an officer who makes the investment decisions. In either case, financial professionals should consider meeting with the decision-makers to discuss the market turbulence and to review the plan’s investments in light of the volatility. This is a good opportunity to stress test the plan’s investments. For example, if a plan’s target date funds (TDFs) have lost more value than the typical target fund, the question is, did the TDFs underperform-suggesting that there are issues, or did the plan have a more aggressively designed target date series? If the latter, is that what the plan sponsor wants and what the participant demographics suggest? If the former, should the plan sponsor consider replacing the TDFs? 

Similarly, if an investment in a particular investment category performed worse than its peer group, is that because it is managed to be on the aggressive end of the spectrum for its category, or are there other problems that warrant attention? 

This isn’t to suggest that investments should be removed just because of the bear market, but instead this is an opportunity to review how the investments performed in a down market and to evaluate if the investments performed differently than expected.

• Consider other Services: Since plan sponsors will likely be concerned about their participants’ unease, this could be a good time to introduce services that will help participants invest for retirement. For example, managed accounts are growing in popularity because of their ability to take into account data about the participant and design a strategy based on a participant’s individual needs and circumstances. Managed accounts can be affirmatively selected by participants and can serve as a Qualified Default Investment Alternative (QDIA) for defaulting participants.

The investment time frame is long-term for retirement and the current volatility should be considered in that context. 

Consider working with recordkeepers to provide more guidance on “benefit adequacy,” such as retirement income projections and gap analysis (that is, whether a participant is on course to a financially secure retirement or needs to defer more to close the “gap”). While this isn’t directly related to the current market volatility, it’s consistent with the message that the investment time frame is long-term for retirement and the current volatility should be considered in that context. As a starting point, financial professionals might offer that service to the plan decision-makers so that they can understand what it is and the value offered to the participants.

Conclusion

While market volatility may be old hat to financial professionals, it’s concerning to many plan sponsors and frightening to most participants. As a result, now is the time for financial professionals to use their knowledge and experience to help plan sponsors and participants weather the market storms. Financial professionals have the ability to provide the right context and to provide historical perspective. That experience and ability is needed now.