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An interview on retirement readiness in any market environment

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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.

Figure 6: Participant actions taken in 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.

FIGURE 7 Value of $100 portfolio

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.

In this issue
Retirement Rethinking equities with retirement & recovery in mind
Investment corner: Outsized gains in equity markets are prompting a number of questions.
Retirement Washington watch: shifts in retirement policy?
Fiduciary perspective: A look at legislative changes that could impact your plan participants.
Retirement Beyond better health: renewing focus on wellness
On the horizon: The physical, mental and financial toll of the pandemic continues to weigh heavily.
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The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. 

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible. 

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index. 

A word on risk 

All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.

Please note that this information should not replace a client’s consultation with a tax professional regarding their tax situation. Nuveen is not a tax advisor. Clients should consult their professional advisors before making any tax or investment decisions.

Nuveen provides investment advisory services through its investment specialists.

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