Trying Times Yield Opportunities for 401(k) Plan Sponsors

By Stephen Miller Jan 18, 2009

MIAMI--Since the stock market began to plummet in 2008, participants in 401(k), 403(b) and similar defined contribution plans have typically seen their accounts drop between 25 to 50 percent—or even more. This once-in-a-lifetime market collapse is being experienced as "a life-altering shock," said Darrell Spence, an economist and vice president of Capital Strategy Research, as he delivered the keynote address at the 17th Annual East Coast Pension & Investment Defined Contribution Conference, held here Feb. 8-10, 2009.

Participants are "scared and disillusioned," Spence said, and they are looking to plan sponsors for perspective and direction. Plan sponsors, in turn, "have to be visible and remain in constant communication with participants," he advised. The key messages to send participants include encouragement to:

Stay diversified.

Stay the course with their contributions.

Stay focused on a long-term horizon if they're not planning to retire within the next five years—and many who had been planning to retiree within that time frame now are not, Spence remarked.

Participants should be counseled to "avoid the desire to go and hide because things are bad," he added.

On a more positive note, "Somewhat counter-intuitively, participants' contribution rates have been holding up, as they understand that they need to replenish their retirement savings," Spence said. To get back on track, it won't be enough to rely on a market recovery, which "can help, but won't be the only factor needed to replenish savings." Higher contribution rates will be needed over the coming years for participants to prepare adequately for retirement—an admittedly tough lesson to convey to participants given the market's continuing volatility.

Participants are:

  • Scared and disillusioned.
  • Looking for perspective and direction.
  • Open to options for reducing their risk.
  • In need of being reminded that most have long-term investment horizons.

And so plan sponsors should:

  • Address obvious issues that can't be ignored.
  • Stay visible and in front of participants.
  • Review plan goals/expectations.
  • Continue evaluating thoughtful, innovative solutions.

Source: The 17th Annual East Coast Defined Contribution Conference

Defined Benefit Plans at Risk

As the floor has fallen out of the capital markets, some have begun to call for "killing the 401(k)" or otherwise suggesting that defined contribution plans undergo a radical revamp. But Spence pointed out that "defined benefit pensions have also been hit hard; they were certainly not immune to external market pressure, contrary to some 401(k) critics," and many defined benefit plan sponsors are scrambling to meet funding requirements for their now-depleted pension plans.

A key take-away: Whether retirement risk is borne by plan sponsors (with defined benefit pensions), participants (with defined contribution plans) or government (with Social Security), "none is a risk-free option," Spence said.

Evolution of Retirement Benefits

The crisis is likely to affect how retirement benefits evolve. A key theme in this debate is how to ensure downside protection—by generating income through dividends tied to securities that fluctuate in value, or through annuity-type insurance products. Of the latter, Spence noted, the promise of a guaranteed income floor must be weighed against higher participant fees and the risk that the insurer will not remain solvent.

Lessons Learned

A variety of retirement benefit and portfolio experts conveyed lessons from the economic crisis, including:

Diversify asset selections. "Diversification didn't work to provide downside protection over the past year, but over time it will work again," said Stacy Schaus, a senior vice president at financial firm PIMCO, during a panel discussion on the Wall Street meltdown. Participants whose assets had been divided 70/30 percent between stocks and bonds are now closer to a 50/50 balance, given the falloff in equity (stock) prices. To what extent should they rebalance back? The answer requires "assessing individuals' risk tolerance, and most participants have learned, to their dismay, that they were facing far more risk than they realized," Schaus said.

Compare target-date funds. "2008 was a test for all of us—participants, sponsors and service providers," observed Roger Williams, managing director and head of defined contribution consulting at Rogerscasey, a 401(k) services firm. "It's important to identify what we've learned," he said. For example, questions have been raised about the percentage of equities vs. fixed income (bonds) in target-date funds, which have increasingly been seen as a "safe" default option but which failed to provide a safe berth during the market storm.

In 2008, the average loss was nearly 25 percent among the 31 funds with 2010 retirement target dates tracked by Morningstar. Depending on which 2010 target-date fund investors were in, their 2008 loss might have been as small as 3.6 percent or as big as 41 percent, highlighting that all target-date funds are not structured in the same way. Plan sponsors have a responsibility to access the amount of equity risk in any target-date fund they might make available to participants, Williams advised.

Re-evaluate fund performance.John Sturiale, managing director for Charles Schwab Investment Management, urged plan sponsors to re-evaluate their fund managers' performance against the market and against their peers. "Ask them the tough questions," he urged.



  • Keeping our participants in the plan and contributing—and from selling at the bottom and getting back in at the top.

  • Assessing how much risk our fund managers are taking, the safety of our stable value fund, and whether our plan is offering the right target-date funds.

  • Reviewing what our advice providers are saying.

Source: The 17th Annual East Coast Defined Contribution Conference

Educating Participants

Christopher Anast, vice president for investment strategies at Mesirow Financial, recommended providing a good mix of actively managed and passive (index-based) funds. He advised putting in place "good education programs so that participants understand asset allocation risk factors and become knowledgeable about the value of diversification over time."

Along similar lines, Fran Ruderman, senior director for benefits and compensation at Leviton Manufacturing Co., commented that "education has to be ongoing, more so than in the past, reinforcing the value of long-term savings."

"There is now a savings gap that participants need to make up," said Matt Radgowski, vice present at Wilshire Associates. "Communicate the danger of trying to 'time the market,' and the impact that continuing to contribute to the plan will have on participants' future income."

Martha Tejera, a principal at consultancy Tejera & Associates, recommended providing call center representatives with scripts to use when participants call to request a loan against their accounts. "Remind participants of how much money they will need to save and how much income they will need to produce to adequately fund their retirement. Translate the effect of a loan or hardship withdrawal on the monthly benefit they can expect in retirement," she said.

While it's good to provide online tools and calculators, Tejera echoed other speakers in noting that, when made available, these often remain under-used by participants.

Several speakers noted that participants tend not to read materials that plan sponsors send them. That's one reason why, according to Joe Masterson, senior vice president at Diversified Investment Advisors, education "needs to be regular and needs to be intense." He recommended seeking help from the plan's service providers to develop educational materials that will engage participants.

"Working with your vendor is critical," Masterson said. "Ask them to share their expertise, and take advantage of that experience."

Stephen Miller is an online editor/manager for SHRM.

Related Report--External:

Update on Participant Activity Amid Market Volatility, Vanguard, February 2009

Related Articles--SHRM:

401(k) Participants Stay the Course, but Markets Take Toll, SHRM Online Benefits Discipline, February 2009

Top 10 Things to Do If Your 401(k) Plan Fails Nondiscrimination Testing, SHRM Online Benefits Discipline, January 2009

401(k) Plans Are Not the Problem, Defenders Say, SHRM Online Benefits Discipline, January 2009

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