Retiring Soon? Stay Put in the Markets.

Hopefully participants closest to retirement are conservatively invested, but either way, the message from retirement plan sponsors should be the same—stay the course with investments.

During this time of painful market volatility, sparked by the outbreak of the coronavirus that causes COVID-19, investors are feeling anxious.

The continued message to long-term investors, such as retirement plan participants, is to stay put in their investment selections in order to benefit from the gains when the market recovers. Aaron Schumm, CEO and founder of Vestwell, a digital retirement platform for 401(k) and 403(b) plans, who is based in New York City, says his firm has seen an increased volume of retirement plan participants reaching out about what to do, and his firm is putting more information into participants’ hands.

He says it is a good time to re-educate participants about defined contribution (DC) plans’ use of dollar-cost averaging. Younger participants may especially need this education as some of them have not yet experienced a down market.

As Investopedia explains, dollar-cost averaging refers to the practice of dividing an investment of an equity up into multiple smaller investments of equal amounts, spaced out over regular intervals—i.e., participant deferrals made each pay period. The goal is to reduce the overall impact of volatility on the price of the target asset; as the price will likely vary each time one of the periodic investments is made, the investment is not as highly subject to volatility. Dollar-cost averaging aims to avoid making the mistake of making one large investment that is poorly timed with regard to asset pricing.

The advice to those retirement plan participants with a long time horizon for investing is to stay put. But what is the advice to those who were planning to retire this year or in the next couple of years? Also stay put.

Gerry Frigon, president and chief investment officer at Taylor Frigon Capital Management in San Luis Obispo, California, says, “Every circumstance is different, regardless if someone is retiring this year or not.  However, if someone was retiring this year, they should have been planning for that long before this all came about, therefore, they are likely in a position that they need to ride this out, wait for recovery and then make adjustments at that point.”

Schumm says people at the tail end of their career should have been tilting toward a more conservative portfolio prior to this bout of market volatility.

Barbara Delaney, principal at StoneStreet Renaissance LLC in Pearl River, New York, says fortunately, target-date funds (TDFs) are doing what their supposed to do right now: They are only down about 9%. She adds that total return funds are still positive year to date, and fixed income, unlike during the 2008/2009 financial crisis, has held up. “That is a positive sign,” she says.

“These are unprecedented times where Baby Boomers are entering into retirement without the guaranteed income of a DB [defined benefit] plan. They need to try to stay the course,” Delaney adds.

In 2016, two professors of economics at Wellesley College investigated the effect of stock market fluctuations on retirement decisions in the United States using data during the 2008/2009 recession and the dot-com crash of 2000 to 2002, and found short-term market dives do not generally slow retirements. Their research suggests that low equity assets near retirement mean a small number of individuals experience large, unexpected losses.

Not Invested Conservatively?

The MassMutual Retirement Savings Risk Study found 94% of pre-retirees and 92% of retirees “strongly agree” or “somewhat agree” that it is important to take steps to avoid major stock market losses right before retirement. However, nearly six in 10 pre-retirees and 32% of retirees described their primary investment strategy as focused on either “aggressive growth” or “moderate growth.”

Delaney says she doesn’t like to see someone retiring next year who is 80% invested in equities. But, the MassMutual study indicates, such scenarios could be the case for some.

Again, however, the advice is to stay put in investments. “They really have no other alternatives,” Delaney says.

Noting that he is not a financial adviser, Schumm says, “It is too late to make a change. They have to be where they are and manage through it.” That, he says, is what he told his father. He adds that if those near retirement are able to stay in the market, they should do so to reap the gains when the market goes up.

Delaney, working remotely, says sitting at home is no fun. “This may lead near-retirees to consider staying at work a little longer. Isolation is not good, and this event may lead people to think about retirement differently,” she speculates.

When Will Markets Go Up?

Of course, no one has a crystal ball to know how long this health and economic crisis will last, but both Schumm and Delaney say the recovery depends mainly on when the virus is stabilized.

Schumm notes that the fallout will be seen in earnings reports in the quarter after things begin to stabilize, so a market recovery could be in six to nine months.

On a positive note, Schumm says, “In 2008, there was a systemic flaw in the financial services industry that caused everything to topple. I see that as much more fragile than now, when it is not a financial flaw causing this. So, if plan sponsors and participants can weather the storm and work through this, and we can flatten the curve of the virus outbreak, they will be in a better situation much quicker than in 2008.”

He adds, “We all knew things were overvalued for a period of time and many were waiting for a correction in the market, so when it rebounds, it will be back to where it should be.”

Hopefully those planning to retire soon have done cash flow planning, as Delaney says when a participant retires, he should know where his income will be drawn from first. “We need a better way to get a drawdown strategy so people can execute a plan in which they know where there first dollar comes from,” she says, adding that the industry has been telling participants to delay taking Social Security, but some may say they can’t do that now.