Investing February 7, 2018

Market Volatility a Good Time to Remind Participants About the Fundamentals

Data from the Alight Solutions 401(k) Index already shows retirement plan participants are reacting poorly to this latest round of stock market volatility, with trading activity described by researchers as “exceptionally high” over recent days.
Reported by

As senior vice president of strategic markets for Hartford Funds, John Diehl spends a lot of time talking to retirement plan advisers in the field about all sorts of evolving topics over time. Lately, Diehl has been focused on helping advisers and their plan sponsor clients digest and understand the changing landscape in which they operate—not just speaking to the shifting regulatory and market outlook, but also addressing the “fundamental changes occurring in our society with respect to the life transitions and retirement income challenges that happen as a result of extended longevity.”

Speaking frankly and honestly about these topics is always beneficial, Diehl tells PLANSPONSOR, but during focused bouts of market volatility, of the sort witnessed in the equity markets this week, they increase even more in importance.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

“As advisers and sponsors, these bouts of volatility actually present a challenge and an opportunity for you to go back to the fundamentals that everyone should regularly be focusing on,” Diehl says. “In this respect, the longer-term context of this week’s market moves is crucial to emphasize. Market gains in the U.S. and globally have been really strong over the last several years for those who have been strategic and patient, so you need to remember this as you view the market moves occurring right now.”

Yet the data from the Alight Solutions 401(k) Index already shows participants are reacting poorly to this latest round of stock market volatility, with trading activity described by researchers as “exceptionally high over recent days.” Trading on Monday was almost 12-times the “normal” level of trading. The last time the 401(k) plan market saw this level of trading was August 2011, coinciding with the last time the S&P 500 saw its biggest single day drop.

“We typically see a spike in trading activity when the market corrects, and Monday was no exception,” says Rob Austin, head of research at Alight Solutions. “Many investors who spent the weekend hearing about how the stock market posted its worst week in years were quick to make changes and sell some of their equities.”

Pullback follows lasting, impressive growth

Based on data provided by Northern Trust Asset Management, institutional plan sponsors had a very strong year of investment gains in 2017, with the median pension plan returning approximately 15.3% in the 12 months ending December 31, 2017. These numbers are based on the Northern Trust Universe, which tracks the performance of approximately 300 large U.S. institutional investment plans, with a combined asset value of approximately $927.5 billion.

Granted, the Northern Trust Universe considers large pension plan sponsors that may have their own unique portfolio approaches which do not exactly match what an individual investor in a defined contribution (DC) plan or a brokerage account could achieve, but that’s really beside the point. The fourth quarter of 2017 marked the ninth consecutive three-month period of gains for institutional investors in the Universe, with equities providing the foundation for positive results over that period.

As noted by Mark Bovier, regional head of investment risk and analytical services at Northern Trust, all plan sponsor segments had median returns above 3% in the fourth quarter of 2017 alone. Important to note, he says, “Each segment took a different path to achieve those gains.” Equities led all asset class returns in the fourth-quarter of 2017, with the median U.S. equity program in the Northern Trust Universe up 6.1%, followed by non-U.S. equities with 4.9% in the period. Fixed income was up a modest 0.7% in the quarter.

On Diehl’s analysis, it makes a lot of sense for plan sponsors to be keeping these numbers fresh in their minds as they contemplate the ongoing equity market swings. And this contemplation should be done within the context of a broader strategic conversation about risk and reward.

“The context is so crucial. Market gains have been really strong over the last several years, so you need to remember this and remind clients of this,” Diehl says. “I think that, depending on how long this volatility sticks around, the behavior of clients could start to change for the worse, if we are not careful. At the time of this conversation it has only been about a week since the violent resurgence of volatility. The longer these swings stick around, naturally the more jittery people will become, and this could become a problem, to some extent.”

As he talks with advisers in the field, Diehl says there is awareness of this possibility, but clients aren’t over-reacting yet, at least as far as he has seen. Again, attitudes could change if the roller coaster of the last week becomes an extended period of loss. It is funny, in a sense, to note that investors never flee the market during a rapid period of gain, which also equally qualifies as an “extreme volatility” event. 

“Perspective is the thing that clients need the most right now,” Diehl concludes. “If you are able to put volatility in the right framework, it can be a healthy catalyst to ask great questions and improve your portfolio positioning. Clients must be contemplating whether they understand the risks they face and whether they have done the appropriate reviews and rebalancing of their long-term strategic objectives, and finally how these are translated into day-to-day trading decisions. We use the phrase ‘intentional investing.’ It’s not just about gliding along and reaping returns and then running away when markets hit a speed bump.”

What about the fixed-income picture?

PLANSPONSOR also caught up with Doug Peebles, fixed income chief investment officer for AB, to get the latest on the fixed-income picture against the background of greater equity market uncertainty.

“I actually think that, in a funny sense, 2018 will be the year where the fixed-income markets do actually get back to some semblance of normal,” Peebles says. “The important context to keep in mind in the fixed-income world is that, since the financial crisis in 2008 and 2009, central banks around the world have printed a tremendous amount of money, underlying the effort to provide ‘quantitative easing.’ This, of course, was meant to support asset prices and to ensure that higher asset prices and wealth fed into and increased capacity to spend, both for governments and for corporations.”

On his analysis, this initial strategy was quite wise. 

“But, at that time I never would have guessed that we would have seen central banks continue this strategy, globally, to reach the amount of money that has been created since the financial crisis,” he explains. “The result is that, broadly speaking, we had a situation develop over the decade where asset prices flourished and repeatedly set new records, while the economies underlying the equity markets did not necessarily fully reflect that growth. After all of this, 2018 will mark in some ways, a final reversal of the quantitative easing program and a return to normal.”

Speaking directly to the issue, Peebles points out that over the last five years, the average yield on the 5-year treasury has been 1.50%, and the low was 68 basis points. Today the yield is 2.60%.

“At the end of the day, there is still a fairly healthy global demand for long-dated lower risk assets, whether it’s coming from pension funds or insurance companies, or others,” Peebles concludes. “By the end of 2018, we can project that the central banks in aggregate will become net sellers of securities. At the same time you have a fiscal policy in the U.S. with the Tax Cuts and Jobs Act that has not come along with a spending cut. … All of this ultimately comes out in the price of fixed income, and the fact that price of fixed income is going down and the yield is going up shows we’re not at equilibrium on the fixed-income side.”

Administration February 6, 2018

How to Help Different Generations With Retirement Savings Challenges

Employees of different generations have different needs when it comes to planning and saving for retirement.
Reported by

At various stages of one’s life, priorities and challenges change. Retirement plan sponsors and advisers need to be aware of these challenges to help Baby Boomers, Millennials and Generation X overcome them so that they can save adequately for retirement.

“Ultimately, the bottom line is when you look at each one of these generations, they all have the same needs and goals,” says William Rose, senior vice president, wealth management, at UBS in New York. “They are just weighting them differently at different stages” of their lives.

Many Baby Boomers have not saved enough for retirement and, therefore, “are looking to extend their working lives and to transition to retirement at an older age,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies in Los Angeles. Plan sponsors and advisers should remind Boomers to “be proactive to be employable by maintaining good health, performing well at their current job and keeping their job skills up to date,” Collinson says.

Plan sponsors and advisers should also make sure that Boomers are aware of the additional $6,000 catch-up contribution they can make on top of the $18,500 limit if they are 50 or older, Collinson says. Baby Boomers should also revisit their asset allocations to be properly invested for their age and risk tolerance. “Financial advisers and plan sponsors are in a wonderful position to deliver those messages,” she says.

Robert Johnson, president and chief executive officer of The American College of Financial Services in Bryn Mawr, Pennsylvania, agrees that the proper asset allocation is critical for Baby Boomers, particularly within five years of retiring when they are in the “red zone.” “Take, for example, someone who retired at the end of 2008,” Johnson says. “If they were invested in the S&P 500, they would have seen their assets fall by 37% in one year. Just as a football team cannot afford to turn the ball over and fail to score points when inside the opponent’s 20-yard line, the retirement investor can’t afford a big downturn in the retirement red zone. This is what is referred to as sequences of returns risk. Taking risk off the table right before retirement is a prudent move.”

Related to sequences of returns risk is decumulation of assets. Advisers and plan sponsors need to help retiring Baby Boomers create a drawdown strategy, Collinson says. “Relatively few plan sponsors offer an annuity as a payout,” she says. “This is something for them to consider. If they are concerned about fiduciary liability, they can at least provide information about the types of retirement income strategies available and point participants in the right direction.”

Advisers and plan sponsors need to discuss health care and long-term care costs in retirement with Baby Boomers, which Boomers are not inclined to want to discuss, says Pat Murphy, president of John Hancock Retirement Plan Services in Boston.

Furthermore, “younger Boomers are not only preparing for retirement but caring for their aging parents,” Murphy says. “And older Boomers are taking on more of their grandchildren’s college debt, rather than have their children or grandchildren take on that debt.”

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Generation X

Generation X “are at an age when they are super busy,” Collinson says. “The critical mass are in their 40s and are likely to be raising kids, perhaps looking after aging parents and paying off credit card debt. They are more likely to have taken a loan from their retirement plan, and many are not saving enough. They are behind [on retirement savings] and need a wake-up call. Many of the things that financial advisers and plan sponsors can do [to help Generation X] are fundamental to retirement planning. Get them engaged by providing them with a calculator to estimate their needs. Do a gap analysis to set forth a plan to help them be in a better position to achieve their goals and get them to save more.”

Murphy agrees that being in their prime years, members of Generation X are juggling multiple priorities. Himself a Gen Xer, he says that he has two children in college and a mother in a nursing home.

Many Gen Xers also are not planning on a hard-stop retirement but, rather, to continue to work. “How does an employer think about a 70-year-old part-time worker, and how does an adviser help them find that work?” he asks.

And, just like working with Baby Boomers, sponsors and advisers need to address health care and long-term care costs in retirement, Murphy adds.

“A major consideration for Generation X and subsequent generations is the struggle between paying down college debt versus saving for retirement,” says John Geli, president of retirement solutions at DST in New York.

Plan sponsors and advisers can help Gen Xers and Millennials analyze the interest rates they are paying on their college debt versus the potential growth and company match in their retirement plan, Collinson says. “Some forms of debt have a high interest rate,” she notes. On the other hand, “if an individual has student debt structured at a low interest rate, that gives them an opportunity to optimize how they think about saving while paying down debt.”

It may also be faulty thinking to include Social Security in the retirement planning of Gen Xers and Millennials, Collinson continues. “Social Security may look very different 30 or 40 years from now, and advisers and sponsors need to be very mindful of that when helping participants in their savings and retirement income planning,” she says.

Millennials

Millennials’ biggest challenges is their risk aversion, Johnson says. Like the Silent Generation who experienced the Great Depression, Millennials “were shaped by the cataclysmic financial event of the financial crisis” of 2008, when they were just entering the workforce, Johnson says.

“[The] challenge here is helping Millennials’ overcome that risk aversion,” Murphy says. “Talk about market cycles. They have not seen that play out until recently. Maybe market forces will help them change their mindset.”

The second biggest challenge facing Millennials is undoubtedly longer life spans, says Tom Conlon, head of client relations at Betterment for Business in New York. “Scientists say that the first person to live to 150 years old may have already been born,” Conlon says. “This will impact how much [Millennials and future generations] will need in retirement. Will they need enough money to last 50 years? Combining this with rising medical costs, the potential for no Social Security and the decline of pension plans, Millennials may need to save more and retire later.”

When working with Millennials on retirement savings, advisers and plan sponsors need to ensure that they present them with a “personalized online experience because they have grown up in a world that has been almost entirely technology based,” Murphy says. “They expect us to know everything about them, and they do not want us to waste their time.”

When working with these various groups, it is important for advisers and sponsors to reach them “with targeted communications that speak to each of these segmented groups, rather than blanket communications,” Conlon says. “For Baby Boomers, make sure they are well prepared to handle medical costs in retirement. For Gen Xers, make sure they are saving more, and for Millennials, make sure they are engaging with advice tools.”

«