Significant market volatility this year has thrown a wrench into the retirement plans of many late-career employees. The good news is that fiduciaries have opportunities to help. In uncertain markets, it’s prudent to emphasize some heightened sensitivity and awareness regarding your fiduciary responsibilities. After all, the legal case of Donovan v. Bierwirth noted that “federal courts have consistently described fiduciary obligations to plan participants and beneficiaries as ‘the highest known to the law.’”
Impact of Market Conditions on Employees
It’s important to understand what employees might need right now. Over the past four decades, the equity market has typically experienced a double-digit drop at some point each year. This year has been particularly challenging with a 25 percent decrease1, due partly to artificial growth caused by the substantial stimulus injected into the market as a result of the pandemic.
When stocks are hit hard, your engaged employees who manage their own portfolios will likely turn to the bond funds within your fiduciary plan. Unfortunately, the bond market this year has been historically terrible, experiencing a 15 percent decline1. But we can reasonably expect improvements in the bond market since it has generated positive annual returns in 42 of the last 46 years.
How To Help as a Fiduciary
Trying to time the stock market is a fool’s errand and nearly impossible. The best days for market performance often occur soon after the worst days, which makes remaining invested a more reliable opportunity for gaining back losses. Ideal investment choices and allocations can vary among employees, and so might their investing approach within the plan.
There are three primary ways for employees to invest: 1) building and maintaining their own portfolio with an emphasis on core funds, 2) opting for an age-based solution in which a target-date fund manager builds and maintains the portfolio, and 3) having an investment manager build and maintain a more customized portfolio based on individual goals and risk preferences. Offering some type of professional portfolio management is important to avoid putting your employees in difficult situations, given how challenging it might be to manage investments on their own.
At your next committee meeting, here are a few important topics to bring up with your investment advisor, especially in these uncertain market conditions:
- Reviewing how and where your participants are investing their assets in your plan: For example, if many employees are invested in target-date funds rather than core funds, whether they manage their own portfolio or have it managed for them, you should probably spend the bulk of your time discussing target-date funds.
- Ensuring that target-date funds meet the goals and priorities of employees: Again, if employees are investing in target-date funds, what’s the strategy of these funds and do they fit the needs of your people? Additionally, are you offering alternatives to employees who don’t want to invest in target-date funds?
- Providing employees with enough education about investment options to make choices that best fit their goals: Appropriate education will help employees properly consider their risk tolerance and available options when making investment decisions.
While it has been a very tough year for the market, historical data does offer some reason for optimism. Now is a good time for you as a fiduciary to take some time to evaluate the structure and usage of your plan and determine what adjustments can be made to continue helping your employees in the best way possible.
Disclaimer: Advisory services offered through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite #150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”).