If you haven’t encouraged plan sponsors to educate participants about what lies ahead, you might want to get started.
During the past two years, defined contribution (DC) plan participants have become more confident about their financial well-being and their prospects for retirement.
Blackrock’s 2018 DC Pulse Survey found positive sentiments about retirement exceeded negative sentiments. When asked to provide “words that best describe how you feel about retirement investing through your plan,” survey participants chose:
- Comfortable (22 percent)
- Concerned (8 percent)
- Hopeful (20 percent)
- Optimistic (19 percent)
- Confident (15 percent)
- Nervous (4 percent)
- Confused (3 percent)
- Frustrated (3 percent)
In addition, 90 percent of participants were at least somewhat confident about their financial circumstances at the end of March 2018.
But, there’s a catch.
Participants’ confidence levels are highly correlated to market performance. As the stock market has risen, so has participants’ optimism about the future. Almost one-half of participants in Blackrock’s survey believe they are on track to meet retirement goals because of strong investment returns. Imagine what may happen when recession arrives, stock markets dip and investment returns are lower.
No one knows when the bull market in U.S. stocks will end. No one knows what will trigger the next recession or when it will begin. Regardless, there has been plenty of speculation about what may be ahead. While negative opinions about the economy and markets haven’t shaken investors’ confidence yet, sentiment can change quickly.
Even if recession and a bear market in stocks prove to be far in the future, it’s a good idea to offer education programs today to prepare and reassure participants for tomorrow. A few of the points that plan sponsors and providers may want to discuss, include:
- Economic cycles are normal and expected, even if the downside of a cycle is unpleasant. According to the National Bureau of Economic Research, from 1854 through 2009, the United States experienced 33 economic cycles. The typical cycle includes four stages:
- Expansion, when sales rise, gross domestic product (GDP)—the value of all goods and services produced—increases, and unemployment declines;
- Peak, when GDP is at its highest, and employment at its lowest;
- Recession, when sales slow or fall, GDP growth slows or declines, and unemployment increases; and
- Trough, which is rock bottom and occurs before conditions improve and expansion begin anew. Analysis by MorningStar indicates that the United States is in the mid- to late-stage of the current expansion.
- Market downturns are painful but temporary, and often create opportunities to invest in attractive opportunities at low prices. During bull markets, the prices of many assets—like stocks and bonds—move higher, overall. During bear markets, they generally move lower. Consequently, it’s possible participants’ account values will decline when a bear market arrives. However, each new contribution to a plan account will be invested in assets that may have lower prices and, when the bear market ends, those prices may move higher and push account values up. During market downturns it’s important to remain patient and keep a long-term outlook.
- Investing in a well-allocated and diversified portfolio can help minimize risk and maximize returns. Asset allocation is like grocery shopping. Most people don’t stock their refrigerators with just carrots because a healthy diet should include more than carrots. So, people fill their carts with fruits, vegetables, proteins, breads and other foods. Often, they diversify within each food group, buying grapes, lemons and cantaloupe or beef, chicken and fish.
The same is true of investing. Participants don’t put all of their savings in a single stock because, if that company doesn’t perform well, their investment will not perform well. Instead, a well-allocated and diversified portfolio may include multiple asset classes—stocks, bonds and others—as well as different types of investments within each asset class. For example, the stock portion of a portfolio may include small, mid-sized and large company stocks in the United States and overseas.
A well-allocated and diversified portfolio won’t prevent losses, but it can help minimize them. (You may also want to discuss default investment choices and the advantages of various types of diversified investments.)
While optimism about financial markets is high—in mid-June, the AAII Investor Sentiment Survey showed the highest levels of bullishness since February—plan sponsors and consultants should organize and deliver education programs that prepare participants for what may be ahead. As they say, an ounce of prevention is worth a pound of cure.
Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 35 years of extensive consulting experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
Before retirement, Terry Dunne was the senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of consulting experience in the financial services industry. He has written extensively on retirement planning, industry trends, technology, and legislation. Millennium Trust performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
