The Markets December 24, 2012

Don’t Fear the Risk Bullies

The 2012 “risk bullies” caused investors to leave equity funds, creating double trouble.
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Not only did investors who left U.S. equities since September 30, 2011, miss out on the potential for a positive 30% return on the funds, but they got a negative 2% real return on cash. This is based on representative indexes used for illustrative purposes only, Russell Investments explained in its paper, “The Backside of the Risk Bully.”

Market risks are creating a “horrible conundrum” in which investors are driven to do the very thing they fear most—not invest as much as they could because of anxiety about volatile markets, Timothy Noonan, managing director of capital markets insights at Russell, told PLANADVISER.

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To fight these fears, advisers must have constructive conversations with clients and explain to them that remaining engaged in the market—even if it is volatile—is the smart thing to do, Noonan said.

Russell’s paper explains that these conversations with clients engender trust and lead to more purposeful engagement, including the ability to remain committed even in volatile markets. The bad news is that it is a difficult discussion for advisers to conduct because it cannot be an impersonal, generalized message like a market forecast. “Indeed, the effectiveness of the ‘risk right’ conversation depends on each client’s situation being uniquely recognized,” the paper said. “The conversation centers on knowing if a client is over or underfunded for the lifestyle they envision in retirement.”

(Cont’d…)

According to the paper’s authors, successfully coping with volatile markets should not include reacting to economic indicators such as GDP growth or unemployment, because markets do not reflect the current economic situation. Rather, markets respond to changes in expectations and attempt to look to future economic performance.

Russell suggested several methods to face the risk bullies including:  

  •  Working with a trusted adviser;
  •  Concentrating on the future;
  •  Recognizing that there will always be uncertainty; and
  •  Making decisions based on the most probable outcomes rather than the plethora of possible outcomes.  

As Russell’s paper said, it is all about “training yourself to be resilient in the face of the risk bully.” After all, risk will always exist.

Compliance December 21, 2012

Participant Disclosure Receives Scant Attention

Since the 404(a)(5) disclosure regulation went into effect in August, sources say they have seen little response from participants.
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“It’s been a non-event,” Charlie Nelson, president of Great-West Retirement Services, told PLANADVISER, referring to the scarce number of calls his company has received from participants about the fees listed on their 401(k) statements as a result of 404(a)(5) disclosure.

Jason Frain, vice president of 401(k) product management and development at Guardian Life Insurance Co., said that after the November 15 statements were sent to participants—the first statements to reflect the new regulations—his company saw very few participants take action or question their statements. “Honestly, we’ve seen very few participant calls or emails coming into our service area,” he said.

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Aside from participant apathy, Frain attributes the lack of questions to the education that took place before participants received their statements, which he said may have helped curb confusion.

Although Nelson said he thinks the Department of Labor’s (DOL’s) “heart was in the right place” in creating the regulation, there is little interest from participants.

(Cont’d…)

Clarence Kehoe, executive partner at Anchin, Block & Anchin LLP Accountants and Advisors, agrees that the idea behind 404(a)(5) was great. “The intent of the new rules I think are wonderful,” he said, but unfortunately they create cost-benefit headaches for plan sponsors. In general, Kehoe thinks the industry’s focus is a bit misguided, valuing lower cost over higher quality.

Frain said 404(a)(5) showed that “no real amount of disclosure is going to change participants’ behavior.” Rather, he noted, participants will change their behavior if actionable steps are easy or taken for them; e.g., automatic enrollment, automatic escalation and managed account solutions.

But all was not lost with 404(a)(5). Frain thinks plan sponsors ultimately benefited from participant disclosure regulation by becoming more aware of fees and services. The regulation also helps plan sponsors with due diligence as they enter into a request for proposal (RFP) or benchmarking process.

In the end, participants do benefit if plan sponsors can make changes that reduce their fees, but it is more of an indirect benefit for participants, Frain said.

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