Arguably, years of central bank stimulus have reduced volatility and increased asset cross-correlation. In this context, a little volatility can feel like the sky is falling. Indeed, the decline in volatility and seemingly unstoppable global equity markets of 2017 perhaps had the unintended effect of causing plan participants to allow their portfolio risk to creep higher, either by failing to rebalance or by deviating from their long-term allocation plans and increasing risk assets to avoid missing out on the party.

While advisers should always educate plan participants and sponsors about proper long-term investing techniques, market volatility teaches lessons that last. Advisers can act as counselors and strive to keep participants on track to meet their goals. And now is a good time for advisers to reach out and touch base with their clients to ensure they’re on track.

Among the items that should be discussed:

Bloomberg/file photo

Advisers should consider the following when planning education and plan sponsor meetings:

1. Proper asset allocation: Either through portfolio allocation drift due to a lack of periodic rebalancing or increased risk taking due to a fear of missing out, participant portfolios may have drifted away from an ideal allocation given their goals and ability and willingness to take risk. Educate participants to keep their long-term goals in mind and invest accordingly. If invested properly, a volatile period in the equity markets should be easier digested.
2. Realign return expectations: The success that we have seen in markets may not be repeatable in the future. In fact, realistic expectations for future returns may be notably more modest as compared to recent results. While plan participants can’t control future returns, they can control their savings rate, which arguably is more critical for building a successful retirement than gangbuster market returns. Increasing contributions now could have the double effect of higher balances due to savings, and the possibility for a lower dollar cost average.
3. Plan investment review: When global markets are going up in unison, it is hard to complain about an investment’s relative results. However, those same investments may not be acting in the way that would be expected given market stress. Are high beta, aggressive positions appropriate for the goals and risk tolerance of plan participants? Do participants know how to use those products effectively? While it would be unwise to judge investments from such short-term results, advisors reflect on the ongoing appropriateness of investments available to a plan.
4. Investment policy statement: It is best practice to review on an annual basis. Align the plan’s investment policy with the broad goals and risk tolerance of the end participants.
5. Target-date suite: Does the target-date suite and its glide path align with the needs of the plan? Remember a target-date’s glide path should align with a plan’s savings rate, demographics and needed income replacement of participants. This means selecting a target-date provider based on more than just performance.

Short-term movements in the financial markets shouldn’t be the basis for investment decisions. However, these points do offer an opportunity to reflect on investment discipline and processes. Are participants and plans ready to weather possible market stress? If not, take advantage of the opportunity to make corrections.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

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