Damage Control in a Downturn
Art by Linda Yan
Even if retirement plan sponsors have been through market downturns and made it out before, these events make them nervous. Defined contribution (DC) plan sponsors are concerned about how participants will react; defined benefit (DB) plan sponsors worry about funded status and required contributions; and both face difficult decisions, trying to balance fiscal responsibilities with fiduciary duties. However, each financial crisis is unique, just as each adviser client is unique.
The effects of the COVID-19 pandemic were recently measured by a PLANSPONSOR pulse survey, fielded among sponsors that responded to our 2019 DC Survey. Findings were that 73% were at least moderately concerned about business/organizational risks. Many sponsors reported they were considering employee layoffs, furloughs or salary reductions.
These concerns were in addition to retirement plan considerations, with one in four thinking about changing their plan’s safe harbor status and nearly one-third considering decreasing or suspending employer match contributions. Even greater numbers were debating whether to expand participant loan limits and offer emergency distributions under provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
The results underlined the importance of advisers to plan sponsors during times of crisis. Sixty-seven percent said they have relied on their plan adviser or consultant for insights or guidance on the potential implications to their organization of the pandemic and/or the CARES Act.
Below, three advisers share strategies to help sponsors of micro plans, 403(b) plans and defined benefit plans during market downturns—especially during the current one.
Micros/Startups
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JOHN K. PALLADINO |
In his book of business, John K. Palladino, managing director and investment adviser representative at 401(k) & 403(b) Fiduciary Advisers, has approximately 30 micro/startup 401(k) plan clients with less than $1 million in plan assets. When there is an economic downturn, such as the Great Recession of 2008 and 2009, and especially now with the market and business reverberations from effects of the COVID-19 pandemic, “their biggest concern is staying afloat and doing anything they can to save money,” Palladino says.
He says a common question he gets from these plan sponsors is: “How do we turn off our match contributions?” He says, for sponsors that offer a safe harbor 401(k), the procedure entails, at least 30 days before the suspension, notifying plan participants that the match will be suspended. Sponsors must also prepare for nondiscrimination testing—maybe for the first time. The smallest-plan sponsors may already be overwhelmed with workforce, business and retirement plan decisions, he notes.
“When going through a tough time like this, people want communication. They want to know what’s going on,” Palladino says. In late March, his firm sent an email blast to clients discussing the pandemic and market volatility. Six attachments addressed topics such as staying calm during bear markets. “These resources were one- or two-page PDFs for clients to post on their intranets or forward to participants, and on the bottom of each was my phone number and email,” he says, adding that all PDF content was run through compliance.
After receiving the email blast, many of the smaller clients asked if Palladino could schedule a webinar to speak to participants in more detail. “We’ve done webinars for clients at no charge, using GoToMeeting for up to 100 participants,” Palladino says. “We talked about the importance of their 401(k). We went through the different topics covered in the PDFs and answered questions.”
He observes that the webinars help plan sponsors fulfill their fiduciary duties without getting into trouble. “We tell them, ‘One reason you have an adviser is you never want to be accused of giving advice.” Providing the webinars and PDF resources was not only good customer service, but they also made participants feel a little better, he says.
Palladino has also been fielding calls from participants, many of whom are nervous, as they have never experienced a downturn or they forgot what happened to their account during the Great Recession. Additionally, there have been calls from terminated participants who have the idea that it would be better to roll their assets out of their 401(k) into an individual retirement account (IRA).
“It’s all about offering touchpoints,” Palladino says. “But it’s also about having a specialist for retirement plans and their investments. Plan sponsors and participants feel comfortable working with someone who is knowledgeable and specializes in retirement plans.”
He says some sponsors just have been wanting a “gut check” that they are doing all they should for their plan. “We stress that they can’t control Congress or the stock market; they should focus on what they can control,” Palladino says. The things he can take off sponsors’ worry list, he does. “They have lots to worry about.”
403(b) Plans
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DANIEL R. CASELLA |
The entities that will sponsor a 403(b) plan have unique challenges during economic downturns, and they are especially being tested during the COVID-19 pandemic. Nonprofits are experiencing a greater demand to take care of people’s basic needs.
Daniel R. Casella, executive director of consulting with Strategic Retirement Group, an affiliate of Resources Investment Advisers, says, “Health care, higher education, nonprofit institutions, and K – 12 schools are all in crisis mode to some degree, with health care at the epicenter.
“Health care is unique right now in that, as a business, they already had tight margins and a poor outlook for the future,” he says. “I’ve sat in many board meetings before this crisis where this was discussed.”
According to Casella, health-care institutions have never faced margins this tight. “The things they make money from they aren’t able to do now. Demand has been pulled away so dramatically, and compensation and benefit costs are a huge spend,” he says.
Resources Investment Advisers manages 280 403(b) plans, of which Casella and his team handle 32. He considers his degree in psychology a bonus for managing client anxiety. He has learned that, often, just using facts can allay stress.
One source of anxiety his team works to manage is the flow of information to plan sponsor clients. “During market downturns, we’re even more respectful of the information flow to them,” he says. “They’re bombarded with information [about business and patient/client matters], and they need help managing it. Downturn or not, they have to uphold a fiduciary process, and clients like it that we get ahead of what they need to do.”
Casella meets with his team each morning, to decide what communications to deliver to clients and how to make them concise. “These daily meetings ensure clients don’t get five different emails from five different people,” he says.
Casella also asks recordkeepers to be sensitive about the information flow. “We ask them to have more regularly scheduled communications with their team, then come to us so we can all be on the same page about what to communicate to clients,” he says. “Clients get one communication at the appropriate time that is well-thought-out by their recordkeeper/TPA [third-party administrator] and adviser.”
Comparing the crisis caused by COVID-19 to the Great Recession, Casella observes that, while there are some common themes between then and now, 403(b)s have substantially evolved. IRS 403(b) regulations were finalized at the beginning of the Great Recession. “Now, we are also introducing better plan designs, investment menu redesigns and target-date funds [TDFs] to them. We are offering more participant-oriented materials.”
Having clients tell him their experiences can give him ideas to pass along. For instance, a committee member will describe how assets are being managed in its plan, or another will relay actions taken that affect participants. Perhaps an especially timely example: A client that eliminated its match during the Great Recession now says it believes this was a mistake. “They said it was a big black eye on the organization,” Casella says. “A decision of this kind is more of a concern now that participant retirement outcomes are a focus.” “It’s important for advisers to have stories to share.”
DB Plans
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RODGER METZGER |
Following a market downturn, the biggest challenge for defined benefit (DB) plan sponsors is the direct effect it will have on their balance sheet and on contributions that need to be made to their DB plans, says Rodger Metzger, president and chief investment officer (CIO) of Hooker & Holcombe Investment Advisors. Hooker & Holcombe is a registered investment adviser (RIA) affiliated with Pensionmark and has about 30 DB plan clients.
Metzger says sponsors of smaller DB plans tend to be more focused on their business and less investment-oriented. Many DB plan sponsors have frozen plans, and a high percentage would love to terminate their plan and get out of the pension business.
“When the market goes down, it hurts assets, and when interest rates go down, it hurts liabilities; plan sponsors experience the ultimate double whammy,” he says. “In the past five years, DB sponsors were hoping assets would keep going up and the Fed would increase rates, and they would be able to terminate their plan with minimum contributions. With the current financial crisis, their hopes have gone away. Right now, they have weaker business prospects combined with expectations of making increased DB contributions and maintaining their plan for several more years.”
In addition, he says, unlike the Great Recession—which felt like a “relentless move down-market”—the crisis caused by COVID-19 was so “fast and furious” in how it developed that clients became especially concerned: notably, small DB plans. “We try to hand-hold individual committee members and put things into a larger perspective.” These committee members think more like retail investors than institutional investors, Metzger says. “We’ve increased communications just to calm anxiety.”
He offers as an example a $30 million DB plan that he typically meets with quarterly. “In mid-March, we moved to weekly meetings, not just to effectuate trades or for rebalancing, but mainly to reassure the committee and make it comfortable with where the market is going and its effect on the plan’s portfolio,” Metzger says. For that client, Metzger and the committee also normally take a much longer view of individual funds and separate accounts. “We look at five-year periods of time because that shows how managers work in an economic cycle,” he explains. But now, Metzger and the committee are scrutinizing funds that were lagging, particularly on the fixed-income side.
As a general rule, his clients’ portfolios are rebalanced quarterly to strategic targets, but in the Great Recession, when it appeared the economy was stalled, Hooker & Holcombe suspended its rebalancing program and relied just on clients’ well-diversified portfolios. With the pandemic, though, the downturn was faster; there was a more responsive fiscal policy; and the market has been moving up and down more, in response to short-term information. For some plans, Metzger’s firm has accelerated rebalancing while others have stayed on the quarterly schedule.
In addition to hand-holding after such an “unexpected big deal,” Metzger makes sure meetings with clients now are face to face. “There’s something to be said about looking at someone’s face to help ease anxiety,” he says.