Capital Ideas

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Market Volatility
How to manage volatility in defined contribution plans
Tim Armour
Chairman and CEO
Jared Franz
Mike Gitlin
Head of Fixed Income
  • Plan participants may be just as concerned with volatility as other investors.
  • Some funds manage volatility for retirement investors better than others.
  • Corrections are great opportunities to reassess menus and discuss objectives.

Retirement plan participants may be long-term investors, but short-term volatility still affects them. A 2012 Center for Retirement Research Study found “contribution amounts and contribution rates declined dramatically” during the 2007—­­2009 financial crisis.

What can plan sponsors do to help weatherproof defined contribution (DC) menus and portfolios against inevitable market volatility?

Here are a few suggestions that keep the unique nature of long-term retirement plan accumulation in mind.

Be selective in fixed income.

Bond investing is the great ballast to stock market volatility — in theory. In practice, the unprecedented monetary easing that followed the 2008 crisis has pushed many fixed income managers further along the credit curve in pursuit of yield. The result may be equity-like volatility for those who assumed historically low rates were here to stay. 


"Given the low interest rate environment, some investment managers have felt comfortable investing — with some investing heavily — in lower quality bonds in order to boost fund yields. This strategy works well — until it doesn't." — Mike Gitlin, head of fixed income


DC plans with limited fixed income options should understand that such strategies may increase the overall risk profile of the portfolio. Core bond funds that are managed to enhance yield by taking equity-like risk will probably not protect investors against equity market declines. Instead, plans should consider bond funds that behave like bond funds, with a low correlation to equity markets.

Welcome corrections for the opportunities they present.

Long-term retirement investors may have a unique perspective on market corrections. For example, those who have worried about having too little growth in their retirement plan portfolio with the economy showing signs of real strength have an opportunity to rectify that imbalance.

The recent market decline was the first 5% correction since June 2016 — and one arguably long overdue. The stock market has hit more than 100 new record highs since then. In fact, the torrid pace of growth has been given as one reason for the recent market decline. And this creates concern that historically low interest rates may start a meaningful rise. Too much growth, in other words. 


"Global consumers are spending, corporate balance sheets are relatively stable and the U.S. tax cuts passed late last year could support upwards of low double-digit earnings growth in 2018." — Jared Franz, economist


Does this sound like a good time for long-term retirement plan investors to be out of stocks?

Increasing contributions during market downturns may lead to stronger gains when the market recovers. In fact, some large plan sponsors have recently begun raising contributions and matches with money saved from the new tax law. Participants may not have the assets to get in at the dip, but they can at least rebalance portfolios that don’t fit their long-term objectives.

How to manage volatility in retirement plan menus.

You can’t control the markets, but you can manage the investments in a DC plan. Here are some practical suggestions for keeping short-term volatility from turning into a long-term worry:

1. Review your target date fund (TDF) series to make sure it has the right blend and type of asset classes to help meet participants’ long-term objectives. Short-term volatility gets attention, but a lack of growth before and during retirement can be a silent killer of retirement portfolios.

2. Simplify the core lineup to a manageable number. Participant indecision and confusion are heightened in times of market stress. Broader mandates may retain diversification and sophistication while making participant choices easier.

3. Look for long-term consistency in menu options. Funds that have consistently outpaced the indexes over market cycles demonstrate they don’t chase returns or rely on a single investment approach. Funds with consistently low fees can reduce the cost of investing, something that’s especially important in market downturns.

Don’t let a good opportunity go to waste.

Market volatility creates conversation opportunities in the rush of daily life that roaring markets simply don’t provide. Corrections can be a great time to review (and re-review) sponsor and participant investment goals, and to re-examine portfolios that may have drifted from their original objectives.

Looking at this opportunity as constructive rather than alarming is a key to long-term investment success.


"The most important lesson I've learned over time is that you have to contain your emotions. It's not easy to do on the way up, and it's not easy to do on the way down, but it is your enemy in terms of creating wealth over time. " 
— Tim Armour, Chairman & CEO


Tim Armour is chairman and CEO of Capital Group, as well as an equity portfolio manager. He has 37 years of investment experience, all at Capital. He holds a bachelor's in economics from Middlebury College.

Jared Franz is an economist covering the U.S. and Latin America. He has 14 years of investment industry experience. Prior to joining Capital in 2014, Jared was head of international macroeconomic research at Hartford Investment Management Company and an international and U.S. economist at T. Rowe Price. He holds a PhD in economics from the University of Illinois and a bachelor's from Northwestern.

Mike Gitlin is head of fixed income at Capital Group. He has 25 years of investment industry experience. Before joining Capital in 2015, Mike was head of fixed income and global head of trading for T. Rowe Price. He holds a bachelor's from Colgate University.

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The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. Income from municipal bonds may be subject to state or local income taxes and/or the federal alternative minimum tax. Certain other income, as well as capital gain distributions, may be taxable. While not directly correlated to changes in interest rates, the values of inflation linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations.

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