BY: RYAN BARNETT, JD | VP, Retirement Services, Heritage Retirement Plan Advisors
A retirement plan is designed to accomplish big goals in small increments over many years. When done successfully, money in a retirement plan accumulates almost imperceptibly, without placing a strain on the participant’s standard of living. And given enough time, the invested funds can grow into a sizable nest egg for the participant to tap into during their post-work life.
A worker who starts saving for retirement in their early 20s might have their money invested for more than 40 years, during which the stock market is bound to experience a series of normal ups and downs. What is less common is the period of uncertainty that we’re living through right now due to the COVID-19 pandemic. Will things go back to normal soon? Or will our economy limp along until a vaccine is developed? Nobody knows the answer.
In light of COVID, most funds have performed under expectations this year, some worse than others. The stock market has experienced a rebound since the March lows, though news of a possible second wave of the pandemic have fueled additional jitters among investors.
The good news for retirement plan participants is that, by and large, they shouldn’t be concerned about these daily market fluctuations. The nice thing about retirement planning is that it accounts for the possibility of a bad quarter or even a bad year. When we make fund selections for a plan, part of what we look for is long-term consistency, where bad periods tend to be balanced out by good periods.
In most investors’ cases, if you are already allocated correctly in your retirement plan, the best course of action right now is to do nothing. At the participant level, you certainly don’t want to make the rash decision of liquidating investments out of concern that their value will drop.
Key Considerations For Retirement Plan Sponsors
Plan sponsors, on the other hand, might be struggling with one big question related to COVID: whether to allow participants to take early distributions from their retirement funds. Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, retirement plans can allow participants to take a coronavirus-related distribution (CRD) of up to $100,000 without paying the 10% early withdrawal penalty or to borrow up to $100,000 from their accounts (normally the limit is the lower of $50,000 or 50 percent of their fully vested balance).
Because this rule change is voluntary, sponsors are debating whether it’s truly in participants’ best interest to increase the borrowing limit and allow for a CRD, or if it opens the door to participants using their savings unwisely.
Some companies are viewing the question empathetically, reasoning that if there’s just one plan participant who truly needs the extra money right now, it’s worth it to change their plan’s provisions. However, once the change has been made, that extra money is open to everybody who has saved it up — and not everybody makes wise decisions when they have higher levels of financial freedom.
Ultimately, these funds contain money that is intended for participants to live on many years from now. It’s the fiduciary responsibility of plan sponsors to protect participants so they have the money they need decades down the road, and that responsibility should guide their decision-making.
At Heritage Retirement Plan Advisors, we’re responding to this period just like any other. We’re continuing to educate plan sponsors and participants during quarterly reviews and at other times, taking all the information behind the numbers and presenting it in an easy-to-understand format.
We’re also encouraging sponsors to periodically look at their investment options to ensure they make sense for the employee population and are prudent. That’s not as a reaction to COVID — it’s just the regular maintenance that is necessary to make sure a plan is still serving its participants as well as it possibly can. Over time, changes in risk appetite or employee demographics might cause a plan sponsor to reevaluate their overall strategy — moving from an aggressive suite of target-date funds to a more conservative one, or broadening into more funds outside the U.S., for example.
Finally, we’re ensuring that each retirement plan has an advisory committee that represents a bouquet of backgrounds. Generally speaking, we look for one member from the human resources department who understands the demographics of employees, members who bring finance and legal backgrounds, and if possible, at least one person with a strong investment background.
During challenging times, your best strategy is to rely on the groundwork and the processes that you’ve already put in place for your retirement plan. You don’t need to do something you’re uncomfortable with in reaction to a hopefully short-term healthcare crisis. If the due diligence on the plan’s investment lineup has always been monitored, the investments will likely continue to be prudent. You can’t control everything, but if you do everything you’re supposed to do, the investments in your portfolio will still make sense in good times and bad.
Argent Retirement Plan Advisors, LLC is an SEC registered investment adviser. A copy of our current written disclosure discussing our advisory services and fees is available upon request. Please See Important Disclosure Information at https://heritagetrust.com/disclosure.
Ryan Barnett is vice president of Retirement Services for Argent / Heritage Retirement Plan Advisors, a Registered Investment Advisor with the SEC that specializes in providing fiduciary and investment advisory services to employer sponsored qualified and non-qualified retirement plans. Ryan has more than a decade of experience in the retirement plan industry as a legal and compliance specialist and plan advisor. Before joining Argent / Heritage, he worked for InvesTrust Retirement Specialists as the director of Retirement Services. Ryan received his bachelor’s degree in business administration from the University of Oklahoma and his law degree from the University of Tulsa.