Retirement plan advisers fulfill many roles, from helping plan sponsors craft investment menus to running due diligence reports on recordkeepers and third-party administrators.
Among their most important functions, says Susan Czochara, retirement solutions practice leader at Northern Trust Asset Management, advisers can serve as teachers who offer timely guidance and reassure participants about the twin topics of risk and market volatility. And as individuals with sizable defined contribution (DC) plan balances reach and enter retirement, Czochara adds, advisers must help plan participants address the critical topic of sequence of returns risk.
According to Czochara, presenting historical data demonstrating the recovery periods that as a general matter always follow market corrections or downturns is one of the most effective ways to help calm down concerned participants. Advisers can also showcase the upsides of diversifying one’s portfolio and offer tailored guidance about assessing one’s risk tolerance. Guidance that is personal and recognizes individuals’ concerns and emotions will obviously be most effective.
Ed Farrington, executive vice president at Natixis, concurs, explaining how participants who feel a sense of reassurance from advisers are likelier to react well during periods of market volatility, even when they are no more knowledgeable about the mechanics of the equity markets. They are also more sanguine about other risks, including longevity, inflation and health care spending.
“The journey is going to be long and it’s going to have moments in time where participants can be scared because the market is down or they have a healthcare expenditure that looks very daunting,” Farrington says. “Much like a personal trainer in a gym, advisers can provide the assistance and training that’s needed to make the right decisions.”
For a couple retiring in their early 60’s, there is a high likelihood that at least one of them will live well into their 90’s. Therefore, the old perception that near-retirees are short-term investors, who must invest conservatively, isn’t realistic anymore. Sequence of returns risk must be considered, but few investment experts would advocate near-retirees should take all their investment risk off the table.
In fact, retirees and near-retirees need to consider growing their capital because of inflation and longevity risk. Participants who choose an excessively conservative investment approach and sit on the cash they’ve accumulated over time can end up losing critical purchasing power, or they can run out of money altogether.
“Participants may experience significant purchasing power erosion if their portfolios don’t take into account the impact of inflation,” Czochara warns.
With all this in mind, Farrington suggests advisers should talk about risk and return as part of the bigger picture.
“Advisers can speak about how these returns are part of a larger puzzle—your spending habits, your health, how much you’ve saved, whether you are taking advantages of all the vehicles you can to save more,” Farrington says. “Advisers can explain these things, and that allows them to put volatility in context.”
According to Farrington and Czochara, advisers can help put clients at ease by discussing the support they will get from federal programs such as Social Security and Medicare.
“Advisers who are knowledgeable and well equipped with tools to help their clients understand the complexities of these topics are best positioned to help them make decisions that are right for them,” Czochara adds.
It is important for advisers to grasp these topics, Farrington agrees, so that participants can understand how a near-term downturn in the market does not necessarily mean turmoil for their retirement.