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Bulls, Bears and Retirement Plans

Practice Management
The stock market has been a veritable rollercoaster in the last year. Three recent studies outline some of the effects of that volatility on retirement plans.
 
The ride predates 2020, T. Rowe Price observes in its Reference Point Annual Benchmarking Report. It notes that in 2019, stocks rebounded from a market correction at the end of 2018 but there was some volatility. And in 2020, Anqi Chen and Nilufer Gok write for the Center for Retirement Research at Boston College in “How Exposed Are Retirement Savings to Market Risk?” that the while the stock market “has largely recovered” from the pandemic-induced, sudden stock market slide, great volatility remains.
 
Chen and Gok write that the shift from traditional pensions to 401(k)s has made market shocks “a growing concern” to the more than 50% of U.S. households with equities. “Markets remain volatile and household financial assets remain vulnerable to these fluctuations during the ongoing recession triggered by COVID-19,” they warn.
 
But while volatility is a growing concern for many participants to Chen and Gok, investment advisory firm NEPC suggests that it does not necessarily spell worry for employers and plan sponsors. Its July 2020 Defined Contribution Flash Poll reports that 90% of the employers and plan sponsors in the study are confident in their investment menu and that they offer options that will allow their plans and plan assets to withstand volatility.
 
So how have market conditions affected plans?
 
Chen and Gok write that the shift from traditional pensions to 401(k)s has heightened the effect of market downturns on retirement plans and readiness. “The stock market’s steep decline has great implications for the retirement assets of American households because of the shift in the nature of pension coverage and the expansion in the ownership of equities,” they posit.
 
Among the effects, Chen and Gok argue, is that since 401(k)s and IRAs are most households’ largest financial asset aside from Social Security, those households are at risk when the market declines. They report that almost 75% of assets in 401(k)s and IRAs are allocated to equities, and that as a result the stock market decline in early 2020 affected “a substantial portion of household financial assets.”
 
The T. Rowe Price report says that the market conditions in 2019 resulted in allocations to money market and stable value investments dropping to a five-year low of 8.2%; they stood at 9.8% the year before.
 
While asset allocations were fairly similar regardless of the number of participants in a plan and asset sizes, T. Rowe Price says that plans that include company stock do not reflect that relative uniformity. They found that larger plans tend to have higher investment allocations to company stock. To wit: plans with total assets of more than $1 billion had average company stock holdings of 11.4%.
 
Action Steps
 
The reports suggest that there are steps plan sponsors can take in light of the market conditions in the last year and a half. Chen and Gok argue that it may now be time to consider risk sharing in employer plans, “so that individuals do not shoulder the full burden.” And T. Rowe Price suggests that plan sponsors consider educating plan participants about the risks entailed in investments that are not diversified, as well as about the importance of making contributions to their retirement accounts.