After a period of relative stability and rising stock prices, the bottom seems to have fallen out. Again. I sometimes feel I need to contact a personal injury lawyer regarding the whiplash that’s resulted from watching prices dive down, roar back up, etc., often for reasons you just can’t figure out. Most personal investors never expected that they would be on such a wild roller coaster ride. Certainly for participants in retirement plans, this can be at best discouraging and at worst disastrous. Since this is not unchartered territory any longer, it’s worth looking back to see what we have learned.
The recollections of our Mid-Sized Retirement & Pension Plan Management Conferences that were held in the depths of the downturn, October, 2008, and March, 2009, are so clear it seems like it was just yesterday. Those were smack dab in the middle of some of the scariest financial times any of us have ever experienced. The speed of the changes that took place was breathtaking. We went from discussions of a possible recession into fears of the next Great Depression nearly overnight. We were knee deep getting ready for our upcoming conferences, but knew it was no longer “business as usual.” We scrambled to make sure we covered every possible topic that could give plan sponsors strategies for handling the situations they faced.
At the October, 2008, program in Chicago, people were in shock. Financial services providers—some of the top names that we grew up with—were facing the very real prospect of going out of business. People were speculating that they might go to an ATM and the machines would be empty. Money markets were faced with the issue of falling below the $1 price.
Then things seemed to stabilize a little…just before the next bottom, March 2009. Retirement plans were also beginning to see significant backlash, a great deal of which was skewed or unwarranted. The “death of the 401K” was being trumpeted by news magazines. Even 60 Minutes and Congress jumped into the fray. Again we had to scramble to address the latest situations as we prepared for our San Francisco conference, particularly since administrators were now facing participants who had seen dramatic drops in their retirement plan balances, had been studying the news reports and wanted answers.
Amongst all the discussions, some of the best strategies evolved from very practical guidance and principles.
Follow your procedures. Many plan sponsors had been unprepared for both the speed and the depth of the market crash. Plans should have procedures in place for handling emergencies. If you haven’t yet gone through that process, you should so you don’t get caught again in the future. Make sure whatever procedures you have in place are followed. Do you call an emergency meeting of the investment committee? Do you trigger an automatic review of underlying investments if certain thresholds are met, such as a 20% drop in equity levels? Do you discuss the issues that are going on with employees? If so, how? Is there something that triggers a review of one or more of your providers? If for some reason you feel you need to do something differently, document what you are doing and the reason. Also, make sure you…
Don’t panic! That’s far easier said than done. After all, every one of us who manages a plan is also a participant in that plan and we have our own uncertainty over what to do with our accounts. Times like these are times for leadership. Your participants
are counting on that. Don’t be surprised if there are people who are angry, sad or bewildered. For many, they are seeing their largest single asset get fall dramatically in value. With the advent of technology, they can now see that in near real-time.
While you may want to say things to people that help them through this, remember…
Don’t inadvertently become a financial adviser. Know what you should say and what you shouldn’t. If this isn’t already clear, speak with your legal counsel and get a professional’s interpretation of what messages you should deliver to employees. Statements as innocent as “I would suggest you stay the course” or “I’m just sitting this out until things stabilize” could, unfortunately, put you on the wrong side of a participant lawsuit some time down the road. Make sure that everyone who is in either an administrative or fiduciary role knows what they can prudently say. You may want to consider directing participant questions to your provider’s call center. You’re likely already paying for this through your plan fees. Go ahead and take advantage of their services.
Inertia is a very powerful force. Inertia can create problems when you are trying to get any kind of movement within the plan, whether it’s to get employees to participate at a higher level or to try to get investment mixes changed. But inertia can be a benefit as well. We saw in the downturn of 2008-2009 that inertia kept participation high in retirement plans, despite the market fall and the economic gloom. A relatively low number of investment changes were made by participants during the crash; most
people didn’t “sell low” nor did they decrease their level of contribution. That’s not to say that there won’t be changes in light of the current insanity. Data is already showing calls to providers are significantly up over the last week, as are transactions. However, the movements only reflect a small percentage of participants.
Retirement plans will not be participants’ only concern. At times like these, people worry about their jobs, their mortgages, a spouse’s job. You name it; it might be on an employee’s mind. Be prepared for some personnel issues that you may not be accustomed to. Assuming the company you work for is able to withstand another potential downturn, it may be useful to send out some sort of assurance to employees to help calm their fears.
Remember history and sound practices. Without falling into the advice trap, you could craft education pieces (or distribute those pieces already prepared by providers) that discuss the importance of diversification, the dangers of trying to time markets, etc. Without a crystal ball, none of us can tell people with 100% certainty that the markets will recover over time, but you can point out basic financial principles that have historically been true. You also might point out that retirement plans are designed to be long-term investments. If you offer age targeted funds in your plan, you can discuss how those are structured to take into account diversification and time to retirement. But, again, keep in mind that caveat about knowing what you should and should not say to remain on the right side of the advice line.
Keep your fingers crossed. As I start to put together my remarks for our final 2011 programs, September in Las Vegas and October in Chicago, I fully anticipate I’m going to have to change them several times before we open the programs. Regardless of what goes on, we’ll be prepared to discuss what’s gone on and what you should be doing as a plan sponsor. When all is said and done, I’m looking forward to more certainty about the future, diminished volatility, stability in the financial markets and the rest of the world and the threat of a recession ending. At least I’m keeping my fingers crossed.
Until then…please feel free to post your comments, we’d love to hear your thoughts. And keep those fingers crossed!
Mid-Sized Retirement and Pension Plan Management Conference
Health and Welfare Plan Management for Mid-Sized Employers
Any opinions expressed are strictly those of the author. The information provided is not legal or tax advice. Such advice should only be obtained through the use of an ERISA attorney or tax advisor.