An interview on retirement readiness in any market environment

next issue no. 6: Participant engagement

TIAA’s 2020 Plan Sponsor Retirement Survey found that as a result of the coronavirus, 50% of 401(k) participants and 69% of plan sponsors are concerned about retiring when they would like. But despite these financial pressures, it is important that participants don’t lose sight of their long-term retirement goals. While plan sponsors cannot control or predict what may come next, there are time-tested strategies that can help prepare participants for retirement regardless of the environment.

Hands off

We spoke to Dan Keady, chief financial planning strategist at TIAA, and he cautions that looking at retirement balances too often “can cause more harm than good. When volatility rises, so do emotions. And when participants put themselves on this emotional roller coaster, it only increases their anxiety and can make them prone to poor decision making.”

He notes it is important to remind participants about the time they have until retirement, especially for younger investors with longer horizons. “Looking at retirement balances every day during turbulent times doesn’t make sense for these participants because they won’t touch the money for many years.” Still, TIAA’s annual Plan Sponsor Retirement Survey found that 77% of participants checked their account balances, and 39% either decreased their contributions or changed how their money was invested during 2020.

Don't cash out

If participants are frequently checking their retirement accounts, remind them to resist the temptation to sell their investments if they see a drop. As Keady puts it, “It might feel like the safe thing to do, but remind them that those losses are on paper only. And throwing money into cash actually cements those losses.” We witnessed this investor behavior last year. Figure 7 tells the story of two participants, both of whom began 2020 with the same portfolios of 50% stocks and 50% bonds. One sold all their stocks on March 31 amid spiking volatility while the other stayed the course. At the time, moving to cash may have seemed like the “safe” choice, but it wound up being the exact opposite.

While this is only one snapshot in time, the point holds true over the long run. Participants may miss crucial rebounds by attempting to “time” their market participation. Instead of jumping in and out of markets, or shifting strategies frequently, participants should follow a more consistent approach. While staying invested can take willpower and fortitude, reminding participants to stay the course and remain invested is often the best way to help them achieve long-term goals. When markets fluctuate, participants may feel the need to act, but with a long-term investment horizon, such as saving for retirement, sometimes the best action is no action at all.

“Rebalancing” act

Many self-directed participants may still have the same allocations they started with when they first enrolled in the 401(k) plan. Over time, those allocations tend to shift as one asset class outperforms another. For example, some participants may unknowingly have a higher allocation to equities than they realize given the advance in stock prices over the last decade. This means their allocations may no longer align with their risk tolerance. That is why it is important for participants to rebalance periodically to avoid being overweight in certain asset classes.

Some experts suggest participants consider rebalancing if the funds in their portfolio have strayed more than 5% to 10% from their original allocation. Others recommend annual or quarterly rebalancing. Either way, it is important to pick a strategy and stick with it. Keady suggests picking the same day every year or quarter to rebalance, which helps avoid making emotional decisions based on market moves.

While rebalancing makes sense in theory, it may be difficult to convince participants to do it. Fortunately, there are tools to make it easier. Offering an automatic rebalancing feature can take the guesswork and anxiety out of the process for participants, allowing participants to set up automatic rebalancing on a regular schedule. In addition, certain menu options such as actively managed target-date funds automatically diversify and rebalance investments over time in line with the participant’s expected retirement year. Target date funds may keep participants from falling into the common trap of selling after asset prices fall because they automatically rebalance over time to align with participants’ time horizons and risk appetites.

Encourage consistent contributions

During periods of uncertainty and increased market volatility, participants can easily lose sight of long-term financial goals, and may even stop contributing to their 401(k). This is the perfect time to reinforce the idea of dollar-cost averaging. By sticking with steady contributions, participants can actually take advantage of stock market downturns as their fixed dollar amount goes further to buy more shares at a lower cost. In fact, the TIAA survey found that 31% of participants actually increased the amount they contributed last year amid higher volatility. Another thing to remind participants: Those who jump in and out of the market have to get it right twice — when to exit and again when to reenter the market.

Market volatility and investment uncertainty are here to stay. But so too is the commitment plan sponsors have to their participants. The important thing is providing the right information and advice to empower participants to make smart choices. While no two participants will have the same retirement time horizon, goals or risk tolerance, there are fundamentals that can lead to improved retirement outcomes: staying the course, proper diversification and consistent saving.

Three bear markets

Since 2000, there have been three bear markets. During each overall market drop, multiple up-market periods add to the complexity of trying to time your actions.

1. Technology bubble
   24 Mar 2000 to 09 Oct 2002
   -47.4% total decline
   41% months with positive return
2. Financial crisis
   09 Oct 2007 to 09 Mar 2009  
   -54.9% total decline
   33% months with positive return
3. COVID-19 health crisis
   19 Feb 2020 to 23 Mar 2020
   -33.5% total decline