Asset Flows Affect Plan Decisions

Art by James Heimer

Participants’ swelling account balances from stock market gains in recent years might have masked the urgency for sponsors to fortify their plans against the potential for asset loss. The time to act is the present, industry experts say.

“While not well-publicized, there is, now, and has been for several years, more money being distributed from plans than being contributed to them,” says Fred Reish, a partner and chairman of the Financial Services ERISA [Employee Retirement Income Security Act] team at Faegre Drinker. “That’s not obvious because of the significant stock market gains over the past decade. But someday the market will go down, and that dynamic will be exposed.”

It is too early to arrive at any grand conclusions as to how plan assets may have suffered from COVID-19’s workforce and economic dislocations, as well as, more recently, inflation and stock market declines, says Katie Hockenmaier, U.S. defined contribution research director at Mercer. However, she notes, some manufacturing-and-technology-sector plan sponsors are clearly in a position of asset outflow.

She says she has seen no significant drain on plan assets from the “Great Resignation,” but “when we get to the end of ’22, it will be much easier—even midway through this year—to see what impact is being made to plans,” she says.

Tracking asset flows can tip sponsors off to any challenges they might have, says Alexa Nerdrum, managing director, retirement, at WTW. “We’re seeing that the pandemic really didn’t lead to some of the mass distributions plan sponsors and others were expecting.” An estimated 2% to 4% of participants made retirement account withdrawals, after passage of the Coronavirus Aid, Relief and Economic Security—or CARES—Act provided special distribution and loan rules for retirement plans and individual retirement accounts, Nerdrum says. Meanwhile, savings rates and plan balances have kept growing, she notes.

Advisers need to factor conditions in the economy into how they advise plan clients, notes Jason A. Johnson, senior vice president – wealth management, and a retirement plan consultant and wealth adviser, with UBS Financial Services Inc. “During periods of high growth, it’s important to consider adding or increasing auto-enrollment percentages and adding auto-escalate. During periods of contraction, plan sponsors can suspend auto-escalate features,” he says.

“It’s also important to evaluate the qualified default investment alternative and consider re-enrollment,” Johnson says. “Participants who take too much risk typically make drastic changes to their asset allocation after a downturn, which is usually a bad long-term decision.” Re-enrolling them into the appropriate QDIA usually lessens the volatility, as the portfolio is more diversified and the asset allocation corresponds to a participant’s age and years until retirement, he says.

“Of course, participants can always choose what they feel is best for their situation, but plan sponsors have a fiduciary responsibility [to them]. This is where an experienced retirement plan [adviser] can add real value,” he says.