The Long View: How to Help Plan Sponsors and Participants Stay on Course

Michael Geraci, CRPC®, AIF®, CIMA®, QKA
Michael Geraci, CRPC®, AIF®, CIMA®, QKA

08.26.20 in The Retirement Plan Advisor

Estimated Reading Time: 4 Minutes (789 words)


The COVID-19 pandemic has touched virtually every facet of our lives—including wreaking havoc on the financial markets. By now, though, we’re well familiar with the effect turbulent market events can have to blur retirement goals. Just think back to the first weeks after the coronavirus outbreak hit the U.S.—plan participant trading activity was more than 14 times the average daily trading volume. So, how can advisors help plan sponsors and participants stay on course during periods of volatility? By keeping them focused on the long view.

Although short-term market pressures can quickly cloud our long-term vision and goals, they can also clarify what we’re hoping to achieve and prompt us to refocus. To help plan sponsor clients and their participants see through the turbulence, reinforce the purpose of defined contribution plans in the first place—they’re specifically designed as long-term investment vehicles for retirement savings. In addition, remind them that retirement isn’t imminent for many participants, so there’s time to make up for market losses.

By providing guidance and time-tested strategies, you can help sponsors ensure that their participants avoid making rash decisions and give them the tools needed to weather storms.

Create a Responsive Framework

Some volatility is inevitable in long-term investing. By providing plan sponsors with a responsive framework for their defined contribution plan, you can help them address the many decisions they need to make now and in the future. Using this framework, they can steer participants toward long-term investing best practices while setting themselves up to act on regulatory provisions and implement financial education and literacy programs—if they haven’t done so already. To help plan sponsors get started, give them the essential building blocks; then, work together to establish and refine a framework that’s right for them. Here are a few practical steps to recommend:

1) Talk to participants. Keeping the lines of communication open is essential. Suggest to your plan sponsor clients that they proactively talk to their participants to help ease their concerns. This may help them avoid making potential mistakes by pulling out of the market at the wrong time. They can share these reassurances and advice with participants on an ongoing basis: Remind participants that target-date funds or qualified default investment alternatives (QDIAs) are designed as long-term investments for all market environments.

  • Point out the benefits of a long-term strategy—pulling out of the market and missing a potential rebound can be costly.

  • Lean on five guiding principles to get through challenging periods: be patient, avoid predictions, stay invested, monitor quality, and remain optimistic and tactful.

2) Keep sight of the end goal. No matter what’s happening in the markets today, remember that the goal of a defined contribution plan is steady and straightforward: to grow savings for retirement. There are a few things plan sponsors can do to help participants keep the big picture in view.

  • Show examples of various phases of the long-term investing life cycle

  • Find resources from the recordkeeping platform to explain how the timing of withdrawing funds might affect their overall retirement objectives

3) Think ahead. Taking a close look now at the plan and the participants can help prepare everyone for future downturns. You might consider asking your plan sponsor clients the following:

  • How well do you know the participants? Gather data on asset flows, trading activity in certain periods, and asset allocation, as well as how participants respond to volatility. This information can help focus the communication strategy.

  • How will the investments and QDIA portfolios hold up in different market environments? Review your due diligence and investment monitoring processes and stress test the options to see how they react in various market scenarios.

4) Meet challenges head on. Focusing on pertinent regulatory changes, shifts in investment offerings, and available investment fiduciary services may help sponsors proactively address issues.

  • The CARES Act offers plan sponsors a lot to consider, from raising retirement loan limits to allowing for hardship distributions (if they didn’t already).

  • Think about investment-specific opportunities to help the plan, such as adding a target-date fund series or a managed account service or increasing fiduciary protection by bringing a 3(21) or 3(38) investment fiduciary into the lineup.

Learn from the Past

As we all know, past results don’t guarantee future performance. But history does provide us with some reassuring insights that can help plan sponsors and participants stay on course—no matter what comes next.

During the 2008 financial crisis, we navigated volatility not unlike what we’ve experienced in recent months. That period was followed by market recovery—and those who managed the long-term time horizons for defined contribution plans reaped benefits. By implementing these strategies with plan sponsors now, you can help them avoid potential future shake-ups to their plans and guide their participants toward long-term benefits.

This material is for educational purposes only and is not intended to provide specific advice.

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