The economic crisis of 2008 was a stark reminder to many 401(k) participants that nothing is certain–especially a person’s retirement savings. Those affected by the downturn and in some cases subsequent depletion of retirement assets were taught an unfortunate lesson on the importance of asset allocation, diversification, and staying the course with their investment strategies. In today’s economic environment, how can retirement plan providers help prepare plan sponsors and their participants for the future, while offering solutions for a secure retirement?
There are many benefits to employing solid investment strategies with touch points on all levels of a retirement plan offering–from the Advisor and plan provider to the plan participant. During the recent downturn, those that fared well did so by establishing a thoughtful investment strategy based on personal goals, objectives and risk tolerance levels as well as remaining invested through the market cycle.
Below is a look at 401(k) investment strategies and industry trends that are helping to protect the future of retirement in an unpredictable economy.
A Turn to Passive Solutions
As witnessed during the credit crisis, markets may exist where core asset classes are closely correlated, moving up and down together. Conversely, there may be periods where passive investing will outperform active investing, and vice versa. As we emerge from the economic crisis, there continues to be a move to passive or index investment options in 401(k) plans. In addition to reducing the risks of active investment management, as lower cost options, passive investing or index funds offer a cost effective solution to participants seeking core exposure to various market sectors.
In bear markets, investors and advisors become more focused on investment expenses relative to their returns. And with the proliferation of new disclosure requirements facing the 401(k) industry, there is an increased focus on the overall fee structure of 401(k) plans. Both factors are further fueling the shift to passive solutions and as a result, plan providers are increasing the number of index fund options available to plan sponsors as a means of managing total plan expenses.
Investors Are Out of Balance
According to a recent study (Cerulli Quantitative Update–Retail Products and Strategies, 2010), the financial crisis could have permanently altered the risk tolerance of some investors and it may be some time before equities reach pre-2008 levels.
In 2009 and 2010, more than 90% of investors’ money flowed into bond funds over equity funds. Unfortunately, many of these investors missed the corresponding surge in equity markets. Today, and as interest rates continue to be at historic lows, investors are wrestling with high allocations to fixed income, low yields on assets, and the potential negative impact of rising interest rates and inflation. These investors are increasingly seeking out advice-driven solutions verses moving their assets directly into equities –hence shifting toward asset allocation and a more balanced portfolio. While diversification and asset allocation are not guarantees, these sound investment tactics can help investors better weather volatile markets and achieve their long term retirement goals.
Despite the negative attention target-date funds received after the downturn, these options are likely to remain the preferred Qualified Default Investment Alternative (QDIA) for many plan sponsors and acceptance is expected to increase. Investment managers and plan providers now have a window of opportunity to educate plan sponsors about the differences between investment options and the value target-date funds provide 401(k) participants.