With markets showing signs of potential extreme volatility in recent weeks, how can employers address the many questions that arise from pension plan members?
When speaking to members, consultants usually emphasize advice on asset allocation based on age and risk tolerance. Many members aren’t honest in their responses, often overstating their tolerance for risk because markets are typically on the rise. But when there’s a retraction in the market, they realize they’re not actually a risky investor. So what are plan sponsors’ responsibilities to members in that scenario?
First of all, it’s important to remember that plan sponsors can’t provide investment advice to members. They aren’t licensed to do so and could face company liability if they do. Instead, employers should be telling members to contact a professional for advice.
Some plan sponsors may choose to do nothing. Sometimes, a memo to members can create unnecessary panic, prompting them to sell out of equities and into investments such as money-market funds. That approach can lead to missed opportunities and lower returns, as timing the market is rarely the right move in such scenarios.
Plan sponsors should be reminding employees about successful investing techniques. They include ensuring the correct asset allocation for their age and tolerance, continuing to contribute during downturns and diversifying across geographies and industries. While those are good reminders, they may come too late if plan sponsors send them out to plan members as a downturn occurs.
Instead, plan sponsors should be hosting regular education sessions for employees. When they provide continuous education, they significantly reduce the need to create reactive communications materials. As well, regular and appropriate education can ensure members are choosing the correct asset allocation for their risk tolerance.
Such education sessions can take many forms, such as online videos, webinars and group or individual meetings. The more options they provide, the better the chance of success, as all plan members learn differently. However, as long as the plan sponsor is delivering a consistent message around risk tolerance and asset allocation, human resources should be getting fewer panicked calls to human resources and plan members will feel more confident about their choices. Also, investment fund menus should include some sort of target-date and target-risk funds to simplify members’ choices.
Fewer panicked plan members means fewer hasty equity sell-offs. That’s a good thing, as the typical investor is rarely correct in timing into and out of the market.
By providing consistent messages to plan members, employers can help them avoid the scenario highlighted in a report published by Fidelity Investments in February 2018. Focusing on U.S. investors during the last market crash, it concluded that those who stayed in the market and had proper asset allocations experienced returns that were more than 20 per cent better than those who exited.
Plan sponsors should be regularly reviewing the communications strategy for their group retirement plans. Doing so may lead to a higher level of investment success for members, reduce panicked calls to human resources and satisfy regulatory requirements.