Staying the Course Sometimes Means Taking Action

In light of the stock market volatility of the past several months, PLANADVISER asked experts if there isn’t something that participants and sponsors should do to alter their portfolios.

The response was unanimous: participants should not change their portfolios, but many suggested they should revisit their risk tolerance. This will help ensure they are properly diversified, that their allocations have not become overweight and that their holdings are performing as expected. If these are all in check, then they shouldn’t make any changes. The key is to remember that the goal of a retirement plan is long-term investing.

Even defined benefit plans rarely make changes in times of volatility, says Mike Fischer, institutional investments executive at U.S. Trust in Charlotte, North Carolina. “If a plan sponsor is seeing greater volatility on the downside than they expected, the first thing they have to do is look at their expectations for returns,” Fischer says. “But merely reacting to the air pockets we see in the market is either looking backwards or market timing, neither of which we advocate. They need to look at their funding and benefits policy and then make asset-allocation decisions based on those policies.”

In fact, for institutional investors, volatility presents strategic opportunities, Fischer says. “The S&P 500 was down 6% in August and 2.5% in September. Hopefully, if they are making any changes, they are moving to assets that have not done well. Otherwise, I don’t expect plan sponsors are looking to change their asset-allocation targets based on the two-month span of the S&P 500. We are telling our clients to stay the course unless something has changed at the company to cause it to revisit its funding, benefit or investment policy.

“We have ongoing conversations with our clients to determine if their needs have changed, but we are not going to tell people to get out of equities because of the volatility we have seen in the last two months,” Fischer continues. “We are overweight equities and underweight fixed income, and that hasn’t changed because of what has been going on in the equities markets in the last 60 to 90 days.”

NEXT: How DC participants and sponsors should respond

Whenever markets become volatile, Marie Vanerian, wealth management adviser at Merrill Lynch in Troy, Michigan, asks her plan sponsor clients to think about three things. First is their investment policy statement, which she describes as “the roadmap for their strategy, their investment philosophy and risk.”

“Second is that they have a very disciplined and diversified asset allocation of stocks, bonds, cash and alternatives. The point of diversification is that if one asset class is struggling, another is doing well and this smooths out the peaks and valleys. We approach asset allocation from the standpoint of risk reduction and not just returns. When we do asset-allocation work for institutional clients, we stress test it to see how it could return in bear markets, and then we dial down the risk in accordance with the plan sponsors’ goals,” Vanerian says.

Susan Viston, a client portfolio manager and head of investment services for multi-asset strategies and solutions at Voya Investment Management in New York, agrees that diversification is the key. “We still believe the best way to manage volatility over the long term is diversification of asset classes. And we believe sponsors should increase participant education to remind them that retirement investments have a long-term horizon, as well as underscore the importance of dollar-cost averaging and the challenges of trying to time the market.”

NEXT: Historical data tells the tale

Third, Vanerian shows her clients data on how the market has performed since 1980. In these past 34 years, the market has experienced an average intra-year decline of 14.2%, but 75% of the time, it ends the year higher. “If we were to react to every economic or capital markets event, then we would be changing strategies every day,” she says. “In the middle of an annual correction, you never change your asset allocation. In the calm of day, you need to develop an asset allocation you can live with in good markets and bad markets and only change it when there is a demographic event, such as a defined contribution participant retiring or a defined benefit plan closing the plan.”

Kendrick Wakeman, CEO of FinMason in Boston, agrees with Fischer and Vanerian that investors should have a portfolio aligned with their risk tolerance and not sell out as the market is declining. “The call to action in this marketplace is to check your risk tolerance and make sure your portfolio is in line with your risk tolerance,” Wakeman says. “Many people don’t do this.” He advises participants to check with their retirement plan adviser for risk tolerance tools.

It is also important to ask the adviser whether the holdings in the portfolio are performing as expected, notes Joe Halpern, chief executive officer of Exceed Investments in New York. “The real thing to do during these stressful markets is to see how your strategies are doing. While it’s only been two months of volatility, it’s a nice period of time to look at your strategy and see if it is performing as expected. I think you should be reactive if the performance isn’t what was expected,” Halpern says. “If losses are worse than expected, you might want to dial it down. If they assets are performing better, then maybe you want to make more of an allocation.”