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.
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.
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.
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.
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.
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.
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.
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