The market has been very volatile within the past year. In the last several months there have been two big dips in the stock market, and interest rates are moving also.
Dean Aloise, global HR consulting leader at Xerox HR Services, in Pittsburgh, Pennsylvania, thinks there are actions plan sponsors should take in reaction to the recent and inevitable future market changes.
For defined benefit (DB) plans, Aloise tells PLANSPONSOR they should be managing their risk budgets. He explains this is the perfect time for DB plan sponsors to see how wildly funded status is swinging. They need to ask themselves how much tolerance they have for this swing. “If funded status is swinging too much, it may be time to change their asset allocation and funding strategy to adjust risk,” he says.
DB plan sponsors should also be monitoring their funding levels. This is a little more specific than managing risk budgets, Aloise notes. In funding rules put in place by the Pension Protection Act (PPA), if a plan’s funded status drops below 80%, the plan cannot pay lump sums, if it drops below 60%, plan sponsors may be forced to freeze the plan for future accruals. Plan sponsors should be concerned about plan restrictions.
In addition, some DB plan sponsors have adopted dynamic asset allocation strategies in which certain actions are taken at certain funded levels. For example, Aloise explains, at 90% funding, a dynamic asset allocation strategy may want to lock in this funding level with a move to bonds. However, with market volatility creating funded status swings, this creates risk. Plan sponsors may need to adjust their strategies.NEXT: Taking a long-term view
For defined contribution (DC) plans, Aloise suggests plan sponsors help employees re-assess their retirement readiness. The new fiduciary rule may give DC plan sponsors pause to offer specific recommendations about adapting investments, but they can lead employees to online tools and resources. “And, ideally the plan sponsor has financial wellness tools and programs in place for participants,” he adds.
DC plan sponsors may want to monitor their investments more closely during this volatile time, but Aloise says they should not panic just because of a short-term period drop.
The advice to not panic applies to all investors—DB plan sponsors, DC plan sponsors and plan participants, he notes. All investors need to take a longer-term view of retirement investing. And, for DB plans, if the plan sponsor has implemented a good long-term glide path and has plans in place to mitigate the risk of volatility, there’s no need to panic.
For every plan sponsor, the reaction to market volatility can be different, Aloise says. For example, a small plan sponsor with a frozen DB plan may see the volatility as the need to fund the plan quickly and terminate it so the plan sponsor doesn’t need to weather the storm. On the other hand, a very large DB plan sponsor may say it can afford this, and when the time is right, it will take action to align the plan.“There is no one right answer for all plan sponsors,” Aloise concludes. “It depends on their risk tolerance, the amount of cushion they have in their funding status and the strategies they have in place.”
« Retirement Industry People Moves