While it’s likely a small mercy that defined contribution plan members, by and large, didn’t have knee-jerk reactions to recent market turbulence, plan sponsors have been rather quiet as well.
Much of this is related to the reality that the people who typically deal with small to mid-size DC plans at their organization are busy with other matters, says Rahul Khasgiwale, senior investment director at Aviva Investors.
“I think they’ve really struggled to have the time and focus to spend on the investment plans, just given the recent market volatility. Some of these [plan sponsors] don’t have the resources to be fully dedicated to the investment plan. So in light of all the turmoil, we’ve seen a lot of these small firms struggling with a whole bunch of issues, from [human resources] issues to ensuring mental well-being of their staff, dealing with work-from-home arrangements to potentially laying people off at the firm.”
But recent shifts in investment offerings moved members into more defensive territory in many cases, he says, noting the ongoing trend of DC plan members buying into funds with diversification benefits — whether that means balanced, target-date or multi-asset funds — meant members didn’t see as dramatic a dent in their account balances as they might have.
A bigger shock, he adds, might have led DC pension members to start panic buying or selling, changing their risk profiles inappropriately, rebalancing at the wrong time or in ways that were misaligned with their long-term goals. “A lot of members who aren’t experts in investments are able to benefit from those broader, proactively managed mandates they have exposure to, which has helped to mitigate the emotional journey they might be going through otherwise.”
However, plan sponsors did have to spring into action to take special care of members who were on the brink of retirement, who were potentially hit harder by the recent turmoil. “Those plan members are somewhat struggling and may be concerned just around the size of their investments given the volatility . . . and whether that pot is significant enough for their retirement goals and needs,” says Khasgiwale. “So that’s been an area where there’s been some movement and DC plan sponsors have had to really step up and speak to these plan members and educate them.”
But apart from looking after those employees, he notes DC plans have been on pause, which is compounded by how drawn out plan design or investment changes can be. “In general, DC plans have significant levels of complexity and governance with either introducing or changing funds and the education of plan members around their new choices. Just from experience of dealing with DC plans, the number of approvals, committees, presentations, delays, it can often take more than a year from start to finish for a new choice.”
However, Khasgiwale says the investment consultants he’s spoken with have said they’re advising plans against making stark changes to their investment offerings right now, even when managers they’re working with have significantly underperformed. “Investment consultants will tend to monitor an underperforming manager for between two and four quarters before even thinking about recommending a change.”