Sequoia Financial Group, headquartered in Akron, Ohio, has been talking about the prolonged bull market to plan sponsor clients during committee meetings.
Sequoia has been letting plan participants know that the U.S. is in the later stages of an economic expansion, says Anthony Gargano, senior manager of institutional services at the independent financial services firm. The two main points for them, he says, are that they should prepare for possible negative performance and they should have the proper asset allocations for that potential bear market.
Participants in risk-based or target-date portfolios automatically get diverse asset allocations. If they opt to build their own portfolios (a third bucket offered by most of Sequoia’s plan sponsors), Sequoia makes sure no more than 25% of their whole portfolio is concentrated in any particular asset class—in large-cap value, for instance—says Gargano.
Some of the target-date funds that Sequoia uses have recently scaled back a bit of their equity exposure, he says, “but it’s only to the tune of a couple percent.” That’s because fund managers realize it’s better for many investors to ride through this bear market and be invested for the long term, he says.
Fixed-income allocations have also remained relatively static, says Gargano. Although there could be some short-term losses for bonds in a rising rate environment, he says, positive long-term results are expected over the full interest-rate cycle as funds acquire new bonds that reflect the higher interest rates.
The 30,000-Foot View
James Martielli, head of defined contribution advisory services for Vanguard Institutional Group, says that there’s been a slight uptick to stable value and money market funds in some retirement plans, but sees this secular trend across the whole Vanguard complex and not just within the defined contribution space.
“Our participants are pretty well behaved,” he says. “We don’t see folks trying to market-time.” A big reason is that target-date funds are capturing a larger share of contributions, and participants are relegating investment decisions to the managers of these funds.
According to Vanguard’s report, “How America Saves 2018,” 92% of plans offered target-date funds in 2017 (up from 68% in 2008) and 75% of plan participants use target-date funds. Not only are a growing number of plan sponsors using them as a default option, notes Martielli, but more than half of participants who have voluntarily enrolled in Vanguard defined contribution plans invest in target-date funds.
Vanguard is constantly evaluating plan demographics, equity risk premiums and capital market assumptions, he says, but the company only infrequently makes changes to the glide paths of its target-date funds. “We always like to say there’s constant debate but not constant change,” says Martielli.