Investing April 6, 2015

Market Timing Among Costliest Participant Mistakes

Effectively timing equity markets is extremely difficult to do, and over the long term, emotional decisionmaking during market lows can rob huge portions of potential returns.
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During a recent research briefing with J.P. Morgan Asset Management, some of the firm’s top retirement strategists highlighted a stark statistic about the impact of emotional decisionmaking on portfolio returns: ill-timed trading can easily cut 50% or more of participant wealth if not identified and prevented.

As David Kelly, J.P. Morgan’s chief global strategist, explains, the difference between a $65,450 balance over 10 years on a $10,000 initial investment and a $32,650 balance in the same time period is just 10 days. In other words, the top-10 days of returns for a decade can bring in as much as half of the gross positive daily returns generated.

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Even more important, Kelly notes, is that six of the best 10 trading days for the S&P 500 between 1995 and the end of 2014 occurred within two weeks of the 10 worst days. This means an individual that routinely reacted to sharp market declines by converting his portfolio to cash and waiting two weeks or more to buy back into equities earned only half the returns of a colleague that stuck with the same portfolio and regularly rebalanced. 

Kelly adds that, for a $10,000 initial investment, missing the 20 best market days drops the resulting account balance to $20,350, and missing the best 30 days would result in just $13,440. Missing 40 days of the best returns (out of a total number of trading days around 2,500 over 10 years) actually drives an investor into negative return territory—for a $9,140 balance.

Kelly says there probably isn’t a “clearer explanation for why trying to time the markets and reacting to the financial news headlines is almost guaranteed to make you do worse, as a retirement investor.”

He urges plan sponsors and advisers to browse J.P. Morgan’s 2015 “Guide to Retirement,” penned by Kelly’s colleague Katherine Roy, chief retirement strategist; along with retirement strategists Sharon Carson and Lena Rizhallah. The report explains that portfolio diversification and automation are critically important for achieving retirement readiness: Even a master-crafted investment menu cannot help participants perform if they turn to cash each time the market dips.  

“This means asset-allocation solutions are among the best options for the biggest number of retirement savers,” Roy says. “Auto-enrollment into a pre-diversified and regularly rebalanced qualified default investment alternative [QDIA] is already a best practice for plan sponsors to adopt.”

Kelly concludes by noting the best- and worst-performing asset classes vary greatly year to year, so rebalancing is an important component of diversification: “Failure to rebalance even a diversified portfolio over the 10-year time period would have resulted in an average annual return of 5.9%, which is 60 basis points lower than the rebalanced asset-allocation portfolio performance.”

The full 2015 “Guide to Retirement” is available for download here.

Compliance April 6, 2015

Fiduciaries to Pay $485K for Failing to Forward Payroll Deductions

The DOL sued retirement plan fiduciaries in Connecticut for failing to forward contributions and loan repayments withheld from participants’ paychecks as required by ERISA.
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A court judgment received by the U.S. Department of Labor (DOL) orders retirement plan fiduciaries to restore $485,560.77 to plan participants.

In 1984, Fletcher-Thompson, Inc., an architectural, engineering and interior design firm headquartered in Bridgeport, Connecticut, established The Fletcher-Thompson Savings Plan to provide retirement benefits for its employees. An investigation by the DOL’s Employee Benefit Security Administration (EBSA) found that, beginning in 2008, the company became delinquent in remitting employee deferrals and loan repayments to the plan. The company ceased remitting anything at all to the plan as of May, 2012. Nevertheless, it continued to withhold contributions and loan repayments from participants’ pay.

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The total amount outstanding, including lost interest, is $485,560.77, the DOL says. It filed a complaint in U.S. District Court against plan fiduciaries on June 9, 2014.

Defendants Fletcher-Thompson, Inc. Savings Plan and Michael S. Marcinek, in their capacities as fiduciaries of the Fletcher-Thompson Inc. Savings Plan, agreed to enter into a consent judgment. The judgment orders them to restore the $485,560.77 to the plan in installments of no less than $40,463.40 per month for 12 months, ensure that non-fiduciary plan participants receive the share to which they are entitled and provide a full accounting to the EBSA each month. The order also prohibits Marcinek from ever again serving as a fiduciary to an Employee Retirement Income Security Act (ERISA)-covered benefit plan.

According to the consent judgment, in connection with the resolution of this matter, the DOL will assess a penalty pursuant to ERISA §502(l) of 20% of the “applicable recovery amount”—$485,560.77. The defendants agree to pay the penalty except to the extent that they seek and are granted a waiver in the Secretary of Labor’s sole discretion.

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