In August of 2015, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 Index (S&P 500) fell by more than 10% for the first time in over 1,400 days. This correction capped the 3rd longest streak in the history of the US stock market*, which had seen company values in both indices more than tripled since March of 2009.While October was one of the best months that the market has experienced in several decades, climbing back up towards new all-time highs, the New Year has kicked things off with a sharp reversion of that trend. From oil price volatility to geopolitical conflicts abroad, the concerns currently facing the world are certainly wide ranging. Those challenges, in combination with the Federal funds rate being increased by a quarter of a percent, have left many retirement plan committees at a critical juncture in time.
If you are serving on your retirement plan’s Committee, or as a plan fiduciary, this could be an important year for you and your team. Listed below are three ideas that we think could help improve your retirement plan and document your oversight and hard work:
1. Survey employee sentiment and research behaviors. If you haven’t conducted a retirement plan survey of your staff in the past few years (or ever), now may be a great time to gauge the pulse of your employee base. There are dozens of ways to accomplish this internally, with Survey Monkey being one of the easier and more widely used vehicles. The key is to provide an anonymous forum for your most valued asset, your employees, to express their concerns, appreciation, and desires with respect to the retirement benefit program that your organization offers. This survey method should also promote open and honest feedback. Here is a short survey that you may want to consider as a template, if increased financial wellness for employees is a priority in 2016.
Once you’ve compiled those responses, try to cross reference some facts and figures on how your employees have reacted during these more recent market downturns. Work with your recordkeeper to run a report and analyze data points such as, 1) recent fund transfers (i.e. moving to part or all “cash”); 2) number of participants that have decreased their savings rates; and 3) increases in the quantity and dollar amounts of loans and hardship requests. By evaluating employee behaviors and attitudes during times of market volatility, your committee can identify more specific needs of your employees and work toward setting strategic goals in the future to improve their financial and retirement picture.
2. Review investment menu simplicity and focus. In general, employer-sponsored retirement plans have exhausted the array of available U.S. equity options during the past 10-15 years. Employees are provided with numerous American-based options ranging from large, mid, small, and both growth and value-oriented investments. While the trend to streamline investments to 5-7 investments has started to become the “new normal” for larger organizations, in my opinion, there still seems to be a lack of a degree of diversification and thoughtfulness within fixed income, or bonds.
The available options in fixed income within a 401(k) (and other defined contribution) investment line-ups remains fairly concentrated for an investor to diversify their portfolio in down markets, as well as periods of rising interest rates. It is quite clear that a majority of employees have trouble understanding the differences between various bond asset categories. Over the next few years, diversity in fixed income holdings could prove to be just as important as the historical emphasis that has been placed on stock diversification. It is also important to recognize that there has been a substantial difference in performance between the different types of core fixed income options, namely those considered “intermediate-term” bonds.
The diversity and quality of one’s bonds and cash holdings may end up being the difference between throwing an office retirement party at age 66 or holding off on the balloons and candles until that employee is well into their 70’s.
3. Money Market reforms and consideration of alternatives. One of the most significant questions that many committees will face in 2016 is what they are going to do in light of money market reform. While many retirement plans still maintain a Money Market fun as the protective vehicle of choice for their employees to utilize ($149B in defined contribution plan assets according to the 2013 SVIA 18th Annual Stable Value Investment & Policy Survey), the tide is beginning to turn. The key items that your committee should be discussing, and properly documenting, this year includes the following.
- The SEC’s regulatory changes (Rule 2a-7) regarding floating NAV and liquidity fees and gates will go into effect between April and October of this year. For many retirement plans, there will likely be an automatic transition to a “government money market fund” so that employees avoid the possibility of seeing red numbers for the first time in many decades.
- There is a more recent onslaught of litigations regarding excessive retirement plan fees that have been popping up. One of the more subtle components of the latest lawsuit against Anthem points at the decision by their fiduciary committee members to offer a Money Market fund as opposed to a higher returning stable value alternative.
- Committees evaluating alternatives may benefit from the consideration of stable value funds. These are designed to preserve capital and prioritize low risk investments. These typically will pay a higher rate than money market funds, however, they may be accompanied by additional costs, in either management fees or penalties.
Over these past few years, CFOs at organizations both large and small have been pressing themselves to figure out how to get the best “bang for their buck” when it comes to the management and return (or lack thereof) of their corporate cash. One could argue that an equal, if not greater, fiduciary responsibility rests on retirement committee members when it comes to the critical decision revolving around what liquid investment option to offer plan participants… that could just possibly end up being the only option that produces a positive return in 2016. Let’s hope not! With these changes in money market funds, regulators will want to see your prudent process for selecting the investments in your plan – even the money market or stable value option.
As retirement plan committee members, your responsibility is to be prudent and document your process; not to hold the crystal ball which accurately predicts the future. Including these three ideas on the agenda of your upcoming 2016 committee meetings will enable you to further fulfill your fiduciary obligations while refining your strategic goals to create a more successful program and better results for your employees.