March 10 00:032020 by Christopher Carosa, CTFA
You can’t escape it. It’s all over the news. Every headline screams of it. Every story twists its way to mention it. You can be certain every 401k retirement saver is thinking about it, fearing what their next statement will reveal.
Time will tell of the 2020 Coronavirus becomes a virulent that created long-term buying opportunities for alert investors or if it is merely a repeat of the 2002/2003 SARS scare. There’s no doubt both strains are deadly, and there’s nothing wrong with preparing for the worst in terms of personal choices.
Yes. Be safe. Avoid large crowds and wash your hands for 20 seconds.
But don’t avoid long-term investments and wash your retirement portfolio of stocks.
Now is the time for 401k plan sponsors to seize their fiduciary mantle and provide the guidance and tools plan participants need to dodge emotional decisions that could ruin their chance for a comfortable retirement.
“Communication is key,” says Jose Cuevas, Vice President of Financial Planning at Wisdom Investments in Rolling Meadows, Illinois. “Plan sponsors should take their fiduciary responsibility seriously and inform their participants as to the current state of the markets. This goes beyond the Coronavirus. In times of uncertainty, plan participants need information that will help them make the best decisions possible for their retirement.”
Plan sponsors must also monitor their service providers to ensure they are offering the right counsel when it is most needed. “We in the finance world sometimes forget that not everyone has the knowledge that we do,” says Taylor Kovar, CEO at Kovar Wealth Management in Lufkin, Texas. “Advisers really need to spend time properly setting market expectations for their investors and informing them about what their best options are for times like this.”
The 401k plan is a machine. Employees must be trained to use it properly, to care for it and to maintain it so it performs in a manner aligned with their best interests. Plan sponsors and service providers play an active role in this training.
“Retirement plan fiduciaries should provide as much financial literacy as possible,” says Dwain Phelps, founder & CEO of Phelps Financial Group in Kennesaw, Georgia. “Education is vital during these times of volatility, and investors should understand clearly how their retirement plan works.”
The simplest way to achieve this objective is to break employee education down into the three components most relevant during times of market crises: risk, timing, and opportunity.
Risk is a very tricky topic. People – including service providers – often use “risk tolerance” measures in ways that are not only unsuitable, but are potential harmful to investors (see “Should 401k Plan Sponsors Ban Risk Tolerance Questionnaires?” FiduciaryNews.com, August 13, 2013). Scott Krase, President of CrossPoint Wealth in Chicago, Illinois, says retirement savers must assess risk in these three dimensions:
What risk do I WANT to take?
What risk to I CURRENTLY have?
What risk do I NEED to take to achieve my retirement goals?
“This pre-empts mistakes or not having a defined plan and being surprised when the market has corrections,” says Krase.
Dejan Ilijevski, President at Sabela Capital Markets in Chicago, Illinois, says 401k plan sponsors must “provide better tools to help match participants portfolios with their tolerance for risk. When investors understand how markets work and are comfortable with their risk exposure, they will be more likely to stay in their seat.”
Timing is another critical element retirement savers need be retold. In light of all the dire market news, plan sponsors should “reiterate that 401ks are long term retirement accounts so we need to think about the next 10-30 years, not the short term,” says Garrett Konrad, Partner at IFC in Auburn, California.
Present events will appear like nothing more than a blip on the graph years from now. “Remind them of their time horizon and focus on the objective facts about the Coronavirus that paint a far more muted picture,” says Max Gokhman, Head of Asset Allocation at Pacific Life Fund Advisors in Newport Beach, California.
Even if retirement is only a few years away, the need to invest for the long term remains. Maya Tussing, Partner and Co-Founder of Fairlight Advisors in San Francisco, California, says “the majority of investors, even those with a shorter time horizon, can benefit from equity exposure to improve risk-adjusted returns.”
Finally, we have that part of the current chaos that offers opportunity. No one should be surprised when the market falls, even if that fall is precipitous. Remember, however, what happens after the fall. “Plan sponsors should be educating their participants on the depth and duration of average market downturns,” says Clint Walkner, Founding Partner at Walkner Condon Financial Advisors in Madison, Wisconsin.
How does plan sponsors do this for employees? They should rely on service provider experts to “provide participants with historical information on past corrections and long-term return data,” says Marc Lichtenfeld, Chief Income Strategist at The Oxford Club in Delray Beach, Florida.
From a plan sponsor perspective, the Coronavirus fear leads to an opportunity to get employees rapt attention when it comes to education. Likewise, that education can show how the market downturn itself represents an opportunity for employees. “401k plans work great in these correction moments because you are continuing to buy shares of the market as it gets cheaper,” says Vincent Barbera, CFP Managing Director at Newbridge Wealth Management in Berwyn, Pennsylvania. “This only benefits you in the long run.”
And plan sponsors should not forget that plan design can also help employees weather storms like this. “There are plenty of great educational resources already available,” says Wade Pfau, Co-Director of the Center for Retirement Income at The American College of Financial Services, King of Prussia, Pennsylvania. “Plan fiduciaries could provide such resources, but it is probably more important to focus on creating good default options that will support good outcomes for those who do nothing. Already we have moved in that direction with the rise of investment options like target date funds that make it easier, psychologically, for investors to stay the course.”
Finally, it matters that 401k plan sponsors share with their plan’s participants the proper perspective.
“Put simply, the best advice on what to do during market uncertainty is nothing – continue with your current investment plan,” says David Ragona, Director of Retirement Operations at Human Interest in San Francisco, California. “If 200 years of stock market history is any indicator, it is likely that investment markets will rebound from negative news and price declines. Realize that short term events and market turmoil are with us to stay and remember to keep any money you need in the next five years out of the stock markets. Is your 401k holding money you’ll need in the next five years? Probably not.”
Christopher Carosa is a keynote speaker, journalist, and the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.
Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.