Guiding Your Retirement Plan Through a Recession

A recession creates an array of challenges for an employer, and among them are its effects on a retirement plan. A May 28 Plan Sponsor Council of America (PSCA) webinar examined what an employer and plan participants should look for and consider regarding the plan and the recovery of the economy.

“Guiding Your Organization's Retirement Plan Through a Recession: Indicators of Economic Recovery/Considerations for Plan Sponsors & Resources Available to Participants” featured the insights of Nancy Gerrie, Partner, Co-Chair, Employee Benefits & Executive Compensation Practice, Winston & Strawn, LLP; Erin Kartheiser, Partner, Winston & Strawn, LLP; Matthew Gnabasik, Partner, Cerity Partners; and Neal Smith, Principal, Cerity Partners. Following are highlights of the discussion.

Conflicting Signals

The market and the economy are giving conflicting signals, Gnabasik noted. The stock market had a “dramatic, virtually unprecedented decline,” he said, but then the S&P 500 began to recover, and now is only 10% below its February 2020 high. “This whipsaw really creates a problem” for investors, Gnabasik said. But, he cautioned, the stock market isn’t the real economy—it’s forward looking.

To highlight the conflicting signals, Gnabasik observed that there are elements and factors that suggest a bearish, as well as a bullish, economy:

Bearish

• A clear and present deep recession
• Continued cash crunch for small businesses
• Historical length of bear markets
• Awaiting “other shoes” to drop
• Early stages for testing protocols
• Lack of market breadth

Bullish

• Large and targeted fiscal policy
• “Whatever it takes” Fed policy
• Leveling of virus cases in the U.S. and around the world
• Relaxing of restrictions in Europe and parts of the U.S.
• Signs of normalization in segments of the credit market
• Healthy banking system

“We expect a U-shaped recovery,” not one that is V-shaped, said Gnabasik, adding that “there will be some permanent structural damage to the economy” and that some industries will be fundamentally altered.” The “recovery will be uneven,” Gnabasik said, but he nonetheless added an optimistic note, telling attendees, “Banks have money, they’re willing to lend. That really bodes well for a sustained recovery.”

Effect of Crisis on Defined Benefit Plans

The economic consequences of the pandemic touch DB plans as well, the panelists noted. “Some plans may not be able to keep plans funded,” Gerrie said, adding that if funding is below certain levels, a plan can’t do lump sum distributions.

Current circumstances they financial hardship because of which employers can elect to use the plan’s 2019 adjusted funded target attainment percentage (AFTAP), the panel noted; in addition, a Pension Benefit Guaranty Corporation (PBGC) Section 4062(e) cessation of operations event may take place. The current circumstances offer also offer opportunities: for instance, deferring minimum contributions to 2021 and the ability to use coronavirus distributions for a DB plan.

Action Steps

Panelists made a variety of suggestions that plan fiduciaries and employers can take in response to the current economic challenges.

They suggested that fiduciaries with responsibility for plan investments can consider:

• demonstrating that they have a prudent process under ERISA;
• documenting steps taken; and
• researching the current situation by gathering information and asking questions of experts.

Kartheiser offered specifics on questions fiduciaries should ask experts, such as:

• Do the plan’s investment options continue to be appropriate?
• What research is the investment advisor or investment manager conducting to assess the reasonableness of each investment option?
• If the plan uses target date funds as the QDIA, does the glide path for the TDFs continue to remain reasonable?
• Does the plan’s investment policy continue to be reasonable and prudent in light of the market uncertainty?
• Should the diversity of the plan’s overall investment portfolio be reevaluated and potentially rebalanced?

Gerrie added that a fiduciary may want to consider whether an entire folio should be reevaluated. “Take a fresh look at the IPS,” she added.

The panel also made suggestions regarding steps ERISA fiduciaries should take. For instance, considering whether service providers will be able to perform their duties given the current COVID-19 shelter-in-place requirements. “Have a backup plan,” Kartheiser suggested. Additional considerations include:

• Whether service providers will be able to effectively communicate with participants and provide the tools and information the participants need to invest, as applicable, and plan for their retirement.
• Making sure that the advisor’s recommendations have been presented to the decision-making body (Investment Committee, for example) and that presentation is documented (meeting minutes, for example) and kept in the permanent files.

There are actions that participants can take to weather volatility, panelists observed, such as:

• Look beyond current headlines.
• Stay the course.
• Focus on the performance of your entire portfolio.
• Allocate and diversify.
• Do not chase investment returns.
• Continue dollar-cost averaging into your retirement account.

“Financial education is very helpful,” Kartheiser added.

Stay Calm

Volatility is a normal part of investing, the panelists reminded attendees. “Historically, most years have had positive returns, even when large intra-year drawdowns (peak to trough decline) have occurred,” they added. “Stay the course,” suggested Smith, continuing, “remember that you are investing for the long term.”