Plan Sponsors Should Be Extra Vigilant During Severe Market Volatility

For both DB and DC plan sponsors, fiduciary actions follow a different time frame when there is a sustained market crisis.

Regardless of the current market volatility, retirement plan fiduciaries should always be acting prudently and in the best interest of their participants. However, some sources say, there are particular questions fiduciaries should be asking themselves at this critical time.

Jim Scheinberg, managing partner, founder and chief investment officer (CIO) at North Pier Search Consulting, says sponsors of defined benefit (DB) plans “should be checking that their assets are conforming to their written investment policy statement [IPS]. The drawdown in equity values has been substantial.

“Their funding levels could be below their targets and possibly below the ranges to which they are bound within their investment policies,” he says. “Some of them are having conversations about rebalancing liquidity displacements in certain asset classes. The problem is, there is no bid in some of those areas, so timing has to be factored into the equation. Committees might need to be changing policies or extending latitude.”

For defined contribution (DC) plans, Scheinberg says, “An area that should be on the front burner of retirement plan committee agendas in the coming quarter is the evaluation of the qualified default investment alternative [QDIA], specifically those that use target-date funds [TDFs]. The QDIA selection process has been relatively easy during the bull market. But this extreme volatility is exposing features that might be more risk prone and perhaps not appropriate for the demographics for whom they were chosen.

“The biggest issue for TDFs and the way they were selected for many plan sponsor portfolios still to this day has been influenced by the preferential pricing of proprietary funds of recordkeepers. Some of the TDFs are in the more aggressive category. Fiduciaries need to revisit that.”

While it is not a fiduciary responsibility, educating participants about how to access their capital through hardship withdrawals or loans is certainly a best practice and a way for plan sponsors to act sensitively toward participants, Scheinberg says. “They should be letting participants know that the CARES Act allows for them to take up to $100,000 from their plans without paying the 10% IRS tax penalty.”

The Coronavirus Aid, Relief and Economic Security (CARES) Act created a new emergency retirement plan distribution option dubbed the “coronavirus related distribution,” or “CRD” for short. A CRD can be drawn from an employer sponsored retirement plan such as a 401(k) or from individual retirement accounts (IRAs) in any amount up to $200,000. Under the terms of the CARES Act, the normal 10% penalty tax levied on early plan distributions by the IRS is waived. In addition, the law doubles the amount of loans that participants can take—from $50,000 to $100,000.

Companies also should consider permitting participants to continue to pay off their loans even after separating from a company to avoid going into default on those loans, he adds.

Bryan Cave Leighton Paisner has a blog on the subject of fiduciaries’ duties at this time. In light of the extreme market volatility, the law firm maintains that fiduciaries should be asking questions of their investment managers and advisers: “When the circumstances include a volatile market, acting prudently may require a fiduciary to research more, ask more questions or more regularly seek expert advice. Many investment managers and plan providers are offering to meet to reassess investment performance and strategy in light of market changes and to discuss fiduciary responsibility and strategy. They are also providing educational materials for responding to market changes. Fiduciaries should utilize these resources and/or take similar action on their own. Since this duty emphasizes process over outcome, fiduciaries should take care to document the actions they take as well as the process behind such actions.”

Likewise, Spencer Fane has a blog on the subject in which it notes that fiduciaries must act prudently  in light of “the circumstances then prevailing.” Fiduciaries should meet to ask how current market conditions could affect their retirement plan. “Consider calling a special meeting to evaluate the situation,” Spencer Fane says. “Waiting until the next regularly scheduled meeting of the fiduciaries–which could be months away–might not be considered prudent in light of the market’s volatility.”

Sponsors of DB plans, Spencer Fane adds, should “consider asking their actuaries to conduct mid-year valuations taking into account current market conditions, so that any contribution increases necessary to avoid at-risk or endangered status can be spread over a longer period.”