In times of crises, being a fiduciary responsible for providing Defined Contribution (DC) plans for employees is especially critical. I have had several discussions with plan sponsors over the last few weeks during which the impact of the pandemic has shaped most conversations. Here are some key takeaways:
For participants, focus on the long term: Call volumes from DC participants and trading activity have increased. The trading tends to be away from equities and towards conservative investments. It’s expected that loan and withdrawal activity will increase too. While activity is higher than average, it’s still the case that most participants have made no changes.
Key Takeaways: There is no silver bullet in how to communicate to participants. Relying on tried and true messages around not panicking, staying the course, remaining diversified and evaluating your risk tolerance is good. I think in many ways, plans are more equipped now relative to 12 years ago given the increased implementation of features like target date funds to provide diversification and automatic rebalancing, advice tools and financial wellness programs.
For plan sponsors addressing near-term issues, maintain a fiduciary mindset: Many employers are addressing near-term issues around not just their DC portfolio, but their DB plan investments and the financial health of their company. These include evaluating the performance of their investments during this time, addressing liquidity, and rebalancing custom solutions. Some companies that are significantly impacted by the current economic slowdown are also looking at their company-match policies, as many did during the last financial crisis. While this is not ideal from a retirement security perspective, it’s understandable that some companies need to make these tough tradeoffs.
Key Takeaways: Many employers need to address some very real near-term challenges. It’s important to take a measured approach, look to lessons from past experiences and think about the long-term consequences of any decision, and it’s always wise to stay true to a robust fiduciary process.
For regulators, beware of unintended consequences: With increased thresholds, reduction of penalties and flexible payback options, the recently passed CARES Act provides greater access to DC balances through loans and withdrawals for those impacted financially by the pandemic. It also provides greater flexibility for retirees with their portfolios by suspending Required Minimum Distributions for the year.
Key Takeaways: Working with their providers, plan sponsors will need to make decisions on whether to apply some of these provisions in their plans. It is understandable why policy makers have allowed for this, but that said, as we’ve moved from a DB to a DC world it’s regrettable that one of the answers is having individuals raid their retirement savings to survive this near-term crisis. I hope future legislation will provide targeted support to those most in need without having to resort to reducing future retirement nest eggs.
For plan sponsors evaluating strategic topics, consider evolving plan design: Many sponsors are looking to take this time to address more medium-to-long-term strategic topics. This includes areas such as menu design, institutional investments and retirement income. Emergency savings accounts are also getting renewed interest considering the financial hardships many workers are facing.
Key Takeaways: The current crisis further highlights how we’ve shifted so much risk to individuals as we’ve moved to a DC world. Thoughtful asset allocation, better diversification and lifetime income solutions are becoming more relevant, and I also wonder if the immense responsibility and time sponsors put in to support their participants will lead to more outsourcing or Multiple Employer Plans.
These are certainly challenging times and at PGIM we hope to be a resource and partner to plan sponsors as we navigate the current environment. In the meantime, I wish you and your loved ones good health during these difficult days.
*Article written for LinkedIn by Josh Cohen, Head of Institutional DC, PGIM