Plan sponsors, recalling 2008, worry about what’ll happen when employees open their plan statements and are disappointed, she says. “It’s almost like employees are getting a little spoiled with this great market,” she adds. She sees a lot of people, even those in their 50s and 60s, 100% allocated to equities. Still, most participants are taking advice and dialing back their equity allocation, she says.
She and her colleagues are reassuring plan sponsors that their fund lineups are expansive enough for employees to diversify their portfolios. Funds should include actively managed funds and passive funds so employees have a choice, she says.
She suggests plans cover all asset categories on the U.S. equity side, including large, mid and small cap. She also recommends offering multiple international fund options (including large-cap blend, emerging markets, small or mid-cap and an index) to enable participants, whose international exposure has expanded in recent years, to diversify risk.
Plan sponsors should also help participants diversify their fixed-income exposure in this period of rising interest rates, she says. She recommends offering two to four options here, she says, including a high-yield fund, a TIPS fund and a core bond fund.
“Fixed income is your risk mitigator, it’s not a return enhancer,” Stout and her colleagues tell plan participants. They also coach them “not to make knee-jerk reactions and move everything to equity,” she says, if they see a 1% negative return in fixed income.
Gary Kleinschmidt, head of retirement sales at Legg Mason, says people have gotten accustomed to picking funds that perform really well in a bull market and many have adopted a “set it and forget it” mentality. The firm has been paying a lot of attention to sequence of returns, which involves market risk and longevity risk.
In early 2018, Legg Mason introduced its Total Advantage target-date funds, which take more of a “set it and defend it” approach, Kleinschmidt says, particularly for people very close to retirement. The funds’ Retirement Keeper tool looks at more than 100 factors each day (including leading economic indicators, market risk factors and credit risk factors) in order to identify where to sell futures for its 2020 target-date portfolios. “If the market goes down, futures will be a ballast for us,” he says.
But scratch the word “if” when you’re talking about market declines, which are inevitable. “It’s there,” says Kleinschmidt. “We just don’t know when it’s going to hit.”