By Mark Olsen, Managing Director at PlanPILOT
Economic uncertainty (such as we’re feeling today throughout the country) has a pervasive effect not only on business in general, but on the behavior and participation of employees enrolled in their company’s retirement savings plan. As an example, in a study released in the Journal of Pension Economics and Finance, researchers estimated that changes in behavior of a young participant during the Great Recession of 2008 could potentially decrease their retirement account value by as much as 8% by age 62.
At PlanPILOT, our experience shows that plan sponsors who are aware of these headwinds to effective retirement savings can prepare ahead of time to lessen the effect on employee participation. Better plan design, enhanced features, and thorough monitoring can all help lower impacts on participants.
Let’s take a look at the various ways economic downturns affect participant behavior.
Changes in Participant Contributions
Not surprisingly, economic downturns and recessions trigger uncertainty and reflexive defensive financial behavior in most consumers, especially those who heavily depend upon a weekly paycheck to meet their living expenses. The daily avalanche of media exposure and economic commentary that may suggest or forecast economic troubles only fan the flames of this uncertainty and instinctual fear among employees.
As a result, just as consumers naturally reduce spending, participants may be inclined to reduce current contributions if they fear they could have their work hours reduced, lose their job, or rising consumer prices may impact their ability to pay their monthly bills. This could incline participants to reduce their regular contributions, both to increase emergency savings and as a behavioral reaction to perceived (or real) threats to basic economic survival.
In addition, not only might eligible employees decline to enroll in the retirement plan during recessionary periods (despite attractive benefits, such as the employer matching contribution), those that do may be reluctant to choose a meaningful contribution rate during recessionary or other difficult periods, due to anxiety over committing too much of their paycheck at the time.
Impact on Employee Management of Their Account
Recessions and other economic declines often catch the consumer by surprise. These periods typically follow surges in consumer spending, heightened credit card and other consumer debt balances, and looser lending practices. As a result, when money becomes tight at home, participants can find themselves in a financial pinch in managing their debt payments and living expenses. This often leads to participant inquiries about loans from their retirement plan and hardship withdrawals.
Since such distributions lower the invested balances of the participants’ account, the net effect is a loss of compounding accumulation and lower probability of the participant meeting their retirement objectives. Participants sometimes justify their withdrawals and loans by rationalizing they will make it up later, but this seldom occurs, due to the same behavior impediments that often interfere with getting employees to enroll in the first place.
Unfortunately, loans and hardship distributions also occur during troughs in the market cycle, when account values have declined. Withdrawals at this inopportune time therefore have a greater impact on future wealth accumulation, since it may take several years of future growth to make up what has been lost by the distribution.
Loss in Account Value Affects Behavior Too
Since defined-contribution retirement plans (e.g., 401(k) or 403(b)) have participant savings and contributions invested in the financial markets (via exchanged traded funds or mutual funds), market pullbacks and volatility can have a significant effect on participant behavior as well.
A declining stock market can cause participants to either revise their contribution amounts (thinking they are contributing to a losing effort) or to reallocate their current holdings to a more conservative portfolio mix (potentially at an unfavorable time to do so). This reactionary behavior can be detrimental to long-term investment returns and retirement goals.
How Plan Sponsors Can Provide Support
There are many ways a plan sponsor can support participants when economic turbulence occurs. Many of these strategies are not difficult to implement and could go a long way in boosting employee morale and enthusiasm for the plan itself and in the workplace.
- Communication: Communicate with employees. Let them know management is well aware of the difficulties everyone is facing in a down economy. Summarize steps the company is taking to assist and support the workforce. Outline new initiatives, features to benefit plans, and resources provided by the company.
- Emphasize educational programs: Whether existing programs or new ones to be added, alert and promote educational workshops, webinars, and other information that could help participants with their financial issues and solutions that may be available.
- Upgrade or implement retirement income planning resources: These programs may help employees understand “how the numbers work” and the possible outcomes before making crucial financial decisions (such as adjusting account allocations or contribution amounts).
- Provide counseling: Many times, employees are not experienced with financial matters to make sound decisions or need qualified expertise with money matters. Provide company-paid debt counselors or financial professionals to meet with participants and answer questions or provide guidance.
- Upgrade retirement account resources to include features to help with concerns or anxiety in difficult market conditions: These could include rebalancing functions, auto-rebalancing, target-date default investment choices, as well as specific articles that address how to approach and navigate through a down market period.
- Review the retirement plan provisions: Are the hardship withdrawal and account loan procedures clear and understandable? Should there be more flexibility or choice for the investment options? Does the plan need an upgrade to reflect current laws and rules or to implement better features and resources?
Some or all of these initiatives can demonstrate the plan sponsor’s commitment to the company’s workforce and participants and foster goodwill and a more positive work environment during difficult periods.
Utilize Expertise to Design an Effective Plan or Improve It
PlanPILOT is uniquely positioned to help employers customize and design retirement benefit plans that meet your needs and objectives. Our mission is to deliver comprehensive advisory services that help plan sponsors meet and exceed their fiduciary responsibilities by providing the proper risk management solutions and independent advice they need and deserve.
Are you ready to upgrade to a new standard for your benefit planning? Reach out to me at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.
About Mark
Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.