With the recent bouts of turmoil, understanding market concepts can prove more overwhelming than ever for participants.
Recognizing the difference between a bull and bear market, examples of risk tolerance and market volatility, and how it all ties into retirement are focuses employers are diffusing to employees, along with how they can seek more information on these topics, whether it’s through increased communication efforts or by seeking advice from a financial adviser.
“Recordkeepers and advisers in the marketplace have provided additional call center support or financial wellness solutions that are aimed at providing participants with an additional resource to manage the markets,” says George Sepsakos, principal at Groom Law Group. “Others have teamed with the plan sponsor’s human resource [HR] personnel to better manage participant questions.”
Among the most important topics is market volatility and how its swings can and will affect retirement accounts. Volatility heavily impacts stock market performance and thus affects investment risk, but just because markets are irregular, it doesn’t mean participants will only see negative returns. Investors still have the opportunity to gain. A Hooker & Holcombe report notes how during fluctuations in market downturns—including the 2008 market crash and the Great Recession—the average growth rate of the S&P 500 produced positive annual returns.
Participants are advised to look toward their long-term financial goals, which includes retirement. “Some plan sponsors have taken this opportunity to remind participants of some basic information about their retirement plan and that their plan is intended to be a long-term investment,” Sepsakos says.
While plan sponsors and financial advisers can understand the fret among investors, Sepsakos urges employers and industry professionals to remind their workers to stay calm during choppy markets. “In this vein, plan sponsors have sent communications to participants that encourage them to ‘stay the course’ and not pay attention to short-term volatility in the marketplace,” he adds.
For those unfamiliar with financial concepts such as market volatility, Megan Yost, vice president of communications at Segal Benz, a benefits communication firm in San Francisco, recommends plan sponsors apply visuals to education guides. As employers are now increasingly communicating via online tools and social media, adding graphics and charts clarifies otherwise complex subjects. For example, “if they can see how an historical downturn affected the markets, that can really help them,” Yost says.
Surveying the Market
Similarly, participants will want to learn how surveying the market could add to their losses or gains. “To help weather difficult market turns, portfolios should reflect both a risk and asset allocation approach,” Hooker & Holcombe reports. Diversifying portfolios with stocks, bonds, cash and alternative asset classes creates a well-mixed balance.
For this talking point, Yost mentions using and defining common financial terms—such as stocks and equities—for those unfamiliar with the concepts. Learning about investment terms can lead to confidence in the markets.
Dollar-cost averaging, for example, may sound complex, but is a fairly simple investment strategy applied in most 401(k)s, in which fixed dollar amounts are invested in the same fund or investment asset over a long period. The goal is to smooth the overall impact of volatility on the price. Instead of making one lump-sum investment in a poor market, for example, multiple smaller investments are made during each market period.
“These terms can be confusing—you want to define them upfront and use them consistently,” Yost adds.
Risk tolerance, an investor’s aptitude to handling investment losses or gains, is another concept participants often misunderstand. “They usually don’t know what this means, but if you talk about their horizon in risk, that could give participants a better sense of what the term means,” Yost proposes.
While associated with investments, risk tolerance examines more of the investor’s psyche—how the investor portrays loss and the reactions to it. Understanding risk tolerance allows investors to examine how they accept potential loss in the markets, especially during times of market volatility. “It’s best to have a lot of communications about volatility and how to manage through these times,” Yost says.
Because participants are more likely to deal with losses now, she notes that it’s normal for most investors to feel anxiety. “When we experience a loss, it’s more powerful than gaining, especially when we’re watching the market fluctuate,” she adds.
If participants choose to take an early distribution out of their defined contribution (DC) plan, it’s important for plan sponsors to discuss the consequences of doing so. Taking money out of the markets means participants could lose out on upturns.
While the Coronavirus Aid, Relief and Economic Security Act (CARES) Act allows for the 10% early withdrawal penalty to be waived on withdrawals up to $100,000, this only applies to participants who qualify for COVID-19 relief. Additionally, income tax on a distribution would still be owed over a three-year period. Unless the money is absolutely needed for a coronavirus-related occurrence, it’s best to avoid taking a distribution, Sepsakos says.
“Communications should encourage participants to think carefully before taking distributions or plan loans, and that it’s generally more advantageous to not take a distribution or loan unless they really need the money for an emergency,” he explains.
Avoid Giving Up
According to the Hooker & Holcombe report, after the 2008 stock market crash, a study found 27% of respondents either stopped saving for their retirement or avoided adding to their DC plan contributions. However, a Fidelity Investments report at the time found that the average 401(k) retirement plan balance rose by 466%, to $297,700 between 2009 and 2019. This shows how the market rebounds after a downturn.
Promoting financial counseling and resources and providing education on the markets can prevent plan participants from making rash decisions. Encouraging virtual one-on-one meetings with the plan’s provider or with a qualified financial adviser and adding webinars, articles and the contact information of plan administrators can also thwart anxiety.
“Employees always need to know where to find information. That’s the big thing that employers are trying to help their employees figure out,” Yost says. “They’re leading participants to that type of content now.”
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