Practicing effective plan management through volatile times

Key takeaways:

• Effective participant communication and education during market volatility can help prevent impulsive decisions and reinforce long-term investing discipline.
• Plan sponsors should view periods of volatility as opportunities to reassess plan design, enhance investment menus and consider features like auto-enrollment and guaranteed income solutions.¹
• Incorporating guaranteed income strategies can offer participants confidence and greater financial security in retirement.

Participant engagement strategies

During periods of market volatility, participants often feel overwhelmed and worried about their financial futures. It is not uncommon for participants to change contributions or consider more active trading in their accounts.⁸ In these situations, it is important to encourage participants to stay the course, as remaining invested in the markets is typically the most effective way to achieve long-term goals.

Participant education must be a top priority during volatile market conditions, especially for those in the earlier stages of their careers who may have had limited exposure to significant market volatility or economic downturns. Also vulnerable are participants in the latter stages of their careers who may not have as much time to see asset values rebound from a potential downturn before they intend to retire. For these investors, communication from a plan sponsor may make the difference between panicked selling and a longer-term perspective that could see values recover before withdrawals are due to start.

Fundamentally, target date funds are designed to mitigate such suboptimal decision-making. Their inherent asset allocation model helps smooth out market volatility and systematically reduces risk as participants approach retirement age. While there’s no one-size-fits-all approach to “staying invested” due to varying individual preferences, long-term financial goals and risk appetites, investors seeking potential market upside while cushioning downside risk may consider a range of specific portfolio allocations.

Why stay invested?

The timeless mantra “stay invested” can be especially challenging during periods of volatility, but historical data overwhelmingly favors remaining in the market, particularly for investors with long-term objectives. Between 1937 and 2024, for example, U.S. stocks delivered positive calendar-year returns 76% of the time, averaging nearly 20% per annum in those years. In the 24% of years with negative returns, losses averaged -12.5%.⁹ The pattern of market performance is difficult to predict and missing even the first few days of a market rebound can lead to long-term underperformance.

Participants who stick to a systematic investing plan may take advantage of stock market downturns to enhance investment returns. Such approaches can reduce the emotion created by market volatility, avoid the traps of market timing and help achieve financial goals. During periods of market instability, it’s best to encourage participants to remain calm, take a breath and consider their options before taking any action.

Consideration should be given to implementing automatic messaging triggers during moments of significant market volatility. These systems are often at the recordkeeper level, so it is worth having a conversation with your relevant provider to see what is possible. When set up correctly and judiciously activated, these mechanisms can send reassuring messaging to participants during times of elevated market stress.

Plan design

Examine the investment fundamentals of the plan

Although periods of heightened market volatility may not seem like the optimal time to dive into the weeds of plan design, they can, in fact, present an opportune moment to focus on fundamental design principles and reassess underlying assumptions. This can help ensure the plan’s optimal performance during market stress. Volatile times also present a valuable opportunity to work with an advisor or consultant to examine ways to enhance the plan’s investment menu and consider the inclusion of guaranteed elements. Market stress can reveal weaknesses in existing options, prompt deeper conversations about participants’ evolving needs, and potentially create momentum for adopting solutions.

Additionally, it is also prudent to reevaluate current plan features, such as auto-enrollment and auto-escalation benefits. Ensuring automatic participant enrollment and appropriate auto-escalation levels to achieve adequate retirement savings rates is crucial. During volatile periods, increasing plan participation and contribution rates can enhance the participants’ asset base, allowing them to potentially benefit from a market recovery to historical return profiles.

It is also worth noting that volatile times could present a favorable environment to initiate a plan if one is not currently in place. When participants observe volatility in the market, the benefits of tax-advantaged savings accounts and consistent contributions into long-term investments can provide reassurance.¹⁰ Given the range of tax benefits and incentives available for companies establishing plans, engaging a specialist advisor to examine any potential options and assess the timing for facilitating employee retirement planning may also be beneficial.

One potential strategy worth consideration is the re-enrollment of participants who may have withdrawn from the plan or ceased contributions. Market volatility may present an appropriate juncture to transition participants from potentially suboptimal allocations to a well-designed Qualified Default Investment Alternative (QDIA).

The role of guaranteed strategies

It is imperative for plan sponsors to conduct a thorough review of investment options within the plan, including the asset allocation strategy of the target date solution and the QDIA, if these are distinct. Specifically, plan sponsors can seek to enhance participant outcomes by engaging in discussions with advisors regarding the potential incorporation of guaranteed accumulation strategies within their target date offerings. By integrating guaranteed income elements, plan sponsors can offer participants a more robust and potentially reassuring investment option, especially during periods of market uncertainty.

401(k) plans, originally designed as supplemental savings plans, have evolved to become primary retirement savings instruments. However, there is a growing recognition that these plans may be disproportionately focused on asset accumulation, with limited provision for lifetime income options.

While target date products remain an important and popular retirement savings tool with both plan sponsors and their employees, there is an emerging trend toward incorporating more lifetime income options to better balance retirees’ asset allocation. A recent survey by Nuveen and the TIAA Institute shows that 92% of participants think that it would be valuable for 401(k) plans in general to include a fixed annuity.¹¹ Furthermore, 90% of employers who offer in-plan guaranteed lifetime income options consider them to be extremely or very valuable for their employees.⁸

In light of these findings, plan sponsors should consider undertaking a comprehensive review of their plan menu in collaboration with their advisors. This review should focus on identifying available guaranteed income strategies that could potentially enhance the plan’s offerings for participants. Such enhancements may provide participants with increased confidence to continue building assets while also offering visibility into potential guaranteed income streams upon reaching retirement.