Data & Research May 9, 2016

Volatility Advisers’ Biggest Concern in First Quarter

Portfolio management was the second big focus, Fidelity found.
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In the first quarter of the year, financial advisers were foremost concerned with market volatility, with 30% citing this as a concern, according to the latest Fidelity Investment Pulse study. Their second area of focus was portfolio management. Their third-biggest area for unease was developments in the political and regulatory landscape.

On the other hand, concerns about interest rates fell from the second biggest area of focus in the fourth quarter of 2015 to the seventh in Q1 2016. This was a dramatic shift, Fidelity Institutional Asset Management said, as interest rates had consistently been one of the top five topics for advisers every quarter for more than two years.

“There is no question that the market had a volatile start to 2016, so it’s no surprise that volatility was a top concern for advisers in the first quarter, particularly in January,” says Scott Couto, president of Fidelity Institutional Asset Management. “Volatility can be uncomfortable, but advisers shouldn’t allow short-term events to dictate changes to long-term strategy. It is important for advisers to focus on what they can control. This starts by helping clients look at longer-term horizons, and by having a plan to invest through market fluctuations.”

Fidelity pointed out that in the wake of the most recent recession, starting in March 2009, the U.S. stock market generated a five-year return of 178%. Similarly, following a dramatic period of Fed tightening, staring in December 1994, the market generated a five-year return of 251%.

The analysis echoes advice that Fidelity issued in early February, when the investment firm said that moving in and out of the market can hurt an investor’s long-term retirement savings. If an investor with a $10,000 portfolio in 2008 moved all of their assets out of equities, by 2015, the portfolio would have grown 74% to $17,360. However,  if the investor kept a portion of the portfolio in equities, the portfolio could have grown 150% to $24,800.

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Client Service May 6, 2016

Helping Plan Sponsor Clients React to Market Volatility

There are certain actions DB and DC plan sponsors can take in response to market swings, but there's no need to panic.
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The market has been very volatile within the past year. In the last several months there have been two big dips in the stock market, and interest rates are moving also.

Dean Aloise, global HR consulting leader at Xerox HR Services, in Pittsburgh, Pennsylvania, thinks there are actions plan sponsors should take in reaction to the recent and inevitable future market changes.

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For defined benefit (DB) plans, Aloise tells PLANSPONSOR they should be managing their risk budgets. He explains this is the perfect time for DB plan sponsors to see how wildly funded status is swinging. They need to ask themselves how much tolerance they have for this swing. “If funded status is swinging too much, it may be time to change their asset allocation and funding strategy to adjust risk,” he says.

DB plan sponsors should also be monitoring their funding levels. This is a little more specific than managing risk budgets, Aloise notes. In funding rules put in place by the Pension Protection Act (PPA), if a plan’s funded status drops below 80%, the plan cannot pay lump sums, if it drops below 60%, plan sponsors may be forced to freeze the plan for future accruals. Plan sponsors should be concerned about plan restrictions.

In addition, some DB plan sponsors have adopted dynamic asset allocation strategies in which certain actions are taken at certain funded levels. For example, Aloise explains, at 90% funding, a dynamic asset allocation strategy may want to lock in this funding level with a move to bonds. However, with market volatility creating funded status swings, this creates risk. Plan sponsors may need to adjust their strategies.

NEXT: Taking a long-term view

For defined contribution (DC) plans, Aloise suggests plan sponsors help employees re-assess their retirement readiness. The new fiduciary rule may give DC plan sponsors pause to offer specific recommendations about adapting investments, but they can lead employees to online tools and resources. “And, ideally the plan sponsor has financial wellness tools and programs in place for participants,” he adds.

DC plan sponsors may want to monitor their investments more closely during this volatile time, but Aloise says they should not panic just because of a short-term period drop.

The advice to not panic applies to all investors—DB plan sponsors, DC plan sponsors and plan participants, he notes. All investors need to take a longer-term view of retirement investing. And, for DB plans, if the plan sponsor has implemented a good long-term glide path and has plans in place to mitigate the risk of volatility, there’s no need to panic.

For every plan sponsor, the reaction to market volatility can be different, Aloise says. For example, a small plan sponsor with a frozen DB plan may see the volatility as the need to fund the plan quickly and terminate it so the plan sponsor doesn’t need to weather the storm. On the other hand, a very large DB plan sponsor may say it can afford this, and when the time is right, it will take action to align the plan.

“There is no one right answer for all plan sponsors,” Aloise concludes. “It depends on their risk tolerance, the amount of cushion they have in their funding status and the strategies they have in place.”

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