In PLANSPONSOR’s “PLUGGED IN—Participant Education in the Current Market Environment’ webcast, retirement plan advisers and PLANSPONSOR Editor-in-Chief Nevin Adams discussed what to tell participants in the financial crisis.
Chard Larsen, president of Moreton Retirement partners, a Denver-based member firm of National Retirement Partners, said it helps to give participants perspective on what’s happened in the past. On the news right now, participants are hearing that this is the worse thing that’s happened since the Great Depression.
Larsen has shown participants what has happened in the Great Depression and how people who stayed the course back then were even able to eventually recover in four years, he said. It’s important to set expectations for participants that downturns are normal, Larsen said. “This isn’t something that they should be thinking has never happened.”
“I’ve always felt that the most important time to educate employees is in times like these,” Larsen said. “Very few people make very emotional decisions when they are getting their statement and everything’s positive.”
James Sampson, director of retirement services at Telamon Insurance & Financial Network in Newton, Massachusetts, mentions that in this crisis there is some opportunity to educate employees who haven’t taken an interest in retirement savings before. While auto-enrollment is positive for many participants, now could be the time to make them more interested in the process. For instance, those who have auto-enrolled into a target-date fund and now see it down 30% might be more interested in receiving education about retirement—and then will have a better shot at retirement, Sampson said. “We’re looking at that as a great opportunity to educate someone that would otherwise have their head in the sand,” Sampson said.
Sampson also said that conceptually target-date funds are great, as it takes the thought process out for the employee. However, he sees problems across the board with them, such as the lack of proper benchmarks.
The current environment could draw more attention to this in the industry, he suggested. Larsen said: “I would much rather have our participants in the current target-date funds today, than picking and choosing their own funds … Even though they’re not perfect, I think they’re one of the best options we have.” As PLANSPONSOR’s Adams said, even the employees who are engaged can get distracted.
Analogies to Keep in Your Belt
How can you encourage employees to continue contributing when it seems like they are burning through money? Sampson uses the example of buying cans of coke to illustrate buying shares in a 401(k) plan. He said if you buy a can of Coke for $1 and it goes down to $0.75, you still have a can of Coke.
You know the can of coke is still worth $1 and maybe $2 someday, and so you stock up on Cokes now and eventually will sell the Coke for even more than you bought it for. As Adams point out, maybe your account is low now, “but the new money going in actually has the opportunity to buy things at a discount.”
Another way to remind employees with a long way to go to stay in the plan is that the market does not rebound in a steady incline, but in short spurts, Larsen said. He said an effective comparison for him is a yo-yo, which goes up and down in spurts. Ultimately, in the long-term, your account is rising, similar to yo-yo-ing up the escalator, he said.
It’s yet to be seen how the current market environment will have an effect on retirement income products.
Larsen said the market will create an additional conversation around having a guaranteed income option within an Employee Retirement Income Security Act (ERISA) plan (see “The Inside Story’). “I do think this will spur more activity and discussion along those types of investment options that help protect against a sharp downturn in the market prior to someone’s retirement,” he said.
That discussion is emphasized by the fact that the 401(k) plans has moved from being supplemental to being a main source of retirement. But as Adams points out, we have not really yet seen a generation that relied on a 401(k) plan retire. “The jury’s still out,” he said.