The recent market moves have been challenging, particularly for investors nearing retirement and younger savers who have never experienced a significant market decline. Retirement and wealth strategies expert Matt Sommer outlines three proactive steps investment committees can take to guide plan participants through this difficult environment.
Investment committees charged with the oversight of their company’s 401(k) retirement plan may be wondering about their duties given recent financial market turmoil. While no one can predict the duration or severity of the current stock market correction – let alone the virus outbreak that precipitated it – there are proactive steps investment committees can take today to ensure they are fulfilling their fiduciary responsibilities while offering employees a pathway to retirement.
We recommend committees include the following four topics on their first quarter meeting agendas. For committees that meet once or twice a year, an off-cycle meeting may be helpful to assess the status of your plan and the well-being of your participants.
Determine if Your Plan Should Adopt Provisions within the CARES Act. The recently enacted CARES Act contains provisions plan sponsors may wish to adopt for their company’s retirement plan. As these provisions are optional, the first step is for committee members to conduct a thorough assessment with the assistance of their services providers.
If adopted, the legislation would allow participants to withdraw up to $100,000 as an in-service distribution, provided certain criteria are met. First, the participant, spouse or dependent must have been diagnosed with COVID-19. Second, the participant must have experienced adverse financial consequences as a result of the disease. There are also a number of tax benefits to the participant for this in-service distribution, including no 10% premature distribution penalty, no mandatory 20% withholding and the recognition of income from the distribution over three years. Finally, the amount withdrawn is eligible to be repaid over three years.
In addition, the legislation would provide added flexibility to a plan’s loan provisions. Specifically, the customary borrowing limits of 50% of a vested balance not to exceed $50,000 would be increased to 100% and $100,000, respectively. Also, any payments that would otherwise be owed on the plan loan through 2020 may be delayed for up to one year.
Monitor Participant Behavior. Ask 401(k) service providers for data regarding the behavior of plan participants during the market correction. Specific information should include the number of website visits and call center inquiries and how these metrics compare to historical norms.
Beyond help-seeking behaviors, it is also important to assess any adverse actions taken by participants. Record-keepers should provide data regarding the number of participants who have lowered their contributions or stopped contributing, as well as transfers from stock investments to bond investments and money market alternatives.
Another area to investigate are steps taken by employees invested in the plan’s qualified default investment alternative (QDIA). These investments are designed to offer a single asset allocation solution for participants who are generally satisfied if their plan selects their asset allocation for them. Inquire if participants are either transferring out of the QDIA or holding investments in addition to the QDIA.
Follow the Investment Policy Statement. While having an Investment Policy Statement (IPS) is optional, it is widely considered a best practice among investment committees. This document provides a road map for the selection of investment options made available to plan participants and how these investments will be monitored over time. Investments that fail their plan’s IPS criteria are typically put on “watch” for one to two quarters and may be eventually replaced.
It is likely that many managers will suffer significant losses in the first quarter of 2020, but that does not necessarily mean these managers should be fired. In fact, most IPSs assess managers’ performance over a three- or five-year period and emphasize relative rather than absolute performance. Nonetheless, it is highly advisable for committees to understand the reasons behind their managers’ recent performance, taking into account any additional exogenous events that may have occurred recently, such as a portfolio manager change or merger with another organization.
Assess the Breadth of Fixed Income Alternatives. Ensuring participants have sufficient options to truly diversify their 401(k) savings is one way to help mitigate the negative impact of market corrections. To help participants build an asset allocation that meets their needs, it is important to offer fixed income alternatives that can act as a buoy in times of market stress and help stabilize overall portfolio valuations.
While many plans offer a broad array of equity alternatives, some offer a limited selection of fixed income alternatives. Typically, these include a money market fund or stable value alternative and a manager tied to the U.S. Barclay’s Intermediate-Term Aggregate Bond Index. These two options are important building blocks to constructing a fixed income portfolio but may not offer participants enough diversity. As a supplement to the Core Bond category, many investment committees have added a multi-sector and/or world bond option. Generally, these options provide more return potential than a core bond option but also have additional risk.
The recent market moves have been challenging, particularly for plan participants nearing retirement and younger savers who have never experienced a significant and potentially sustained long-term stock market decline. The good news is that investment committees can take steps to guide plan participants through this difficult environment.
If you would like to learn about our capabilities, please contact your Janus Henderson representative.
Subscribe for relevant insights delivered straight to your inbox