401(k) Specialist Issue 3 - 2020 - 47

Even with TDFs,
if investors are
exposed to too
much risk, 'that
can cause a
significant pain
in your gut.'
-Jake Gilliam, Charles Schwab
Investment Management
the volatility in the market, and then benefit
from the rebounds that we've all seen here in
the second quarter, " he said.
TDF Investors vs. Self-Directors
For many 401(k) participants, a TDF is their
primary, if not their only, retirement investment.
As such, these funds have a very different objective
than that of traditional investments.
" You can't just build it assuming that people
will robotically behave the way that you want
them to and sustain investments throughout
dramatic downside, " Gilliam explained. Even
with TDFs, if investors are exposed to too
much risk, " that can cause a significant pain in
your gut as you're going through the experiences
of March. "
Schwab tends to design TDFs that are more
conservative relative to peers as they approach
their target date, Gilliam said.
" Some providers will have a higher amount
of equity exposure near retirement because,
theoretically, they're trying to solve for potentially
weaker savings behavior. If you have
additional market exposure, that could help you
make up for a savings shortfall, " he explained.
If risk is too high, those savers who particularly
need to stay invested may be tempted to
" flee the market to save the capital they have,
even if it's not enough, and then miss out on
the rebound. "
Advisors need to carefully consider participants'
needs and objectives, and " not look at inMinority
of Participants Make
Pandemic-Fueled Plan Changes
F
ew participants have changed their saving behavior since the pandemic started,
according to a pulse survey of large plan sponsors. The Defined Contribution
Institutional Investment Association polled 40 large sponsors in April and May,
and found participant behavior has held steady. The most common behaviors are to
reduce or stop contributions; 14% of sponsors said their participants have taken one
of those steps.
Just 12% of sponsors have seen their participants decrease equity allocations,
according to DCIIA. Just 8% of sponsors reported changes to participants' investment
allocations among TDF investors, compared with 10% of self-directed investors.
DCIIA found 8% of sponsors have received loan or withdrawal requests from participants,
and 6% reported cashouts. Interestingly, 6% of sponsors reported increases in
equity allocations.
Sponsors themselves haven't been quick to change their plan behavior, either. Just
9% are considering or have taken steps to reduce their company match, while 14%
have suspended their match or will soon.
The biggest change in sponsors' priorities coming out of the pandemic is to offer
more assistance with emergency savings for participants, the survey found, followed
by increasing education regarding budgeting and financial wellness. Sponsors
showed little interest in guaranteed income products. Fewer than 20% said they
already offer or were reprioritizing guaranteed income products.
vestors as dot plots on an Excel sheet; you have
to really understand what drives their behavior
and keep them in the markets and on track for
a successful retirement, " Gilliam said.
Outside of TDFs, Morningstar's Blanchett
noted some investors are taking advantage of
the market decline by using apps like Robinhood
or Schwab's trading platform.
" Now that there are no commissions, they're
trying to trade the market, which is a good
thing because historically, when markets have
gone down, a lot of people have been very
afraid, " he said.
He continued, " I don't want that necessarily
to carry over and have folks all of a sudden daytrade
their [401(k)] account, but if you look
at some of the effects in the research, young
people [are] making better reactions, better decisions
than older investors to market changes. "
Lessons for Advisors
As the market begins to recover, and
concerns of a second wave of the pandemic
simmer, Blanchett encourages advisors to think
about implementing a re-enrollment program
for their plan sponsors.
" Less than 20% of plans have ever done a
re-enrollment, " he said. " There's obviously a lot
going on right now, but get that top-of-mind
to plan sponsors. "
He pointed out that in 2008, during the
Great Recession, TDFs were still a fairly new
product. Today, there's much more research
about their performance and effect on participant
behavior.
" Now is the time to talk to plan sponsors
about how [to] get more participants to be in
a professionally managed portfolio, because we
don't want them self-directing, " Blanchett said.
Schwab's Gilliam stressed the value of investors
holding steady through times of market
uncertainty.
" Trying to react or predict the market generally
leads to outcomes that no one wants, " he
said. " Having a good financial plan, continuing
to invest through volatility, is one of the best
things that anyone can do to keep themselves
on track for long-term retirement success. "
ISSUE 3 2020 | 401kSpecialist.com
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401(k) Specialist Issue 3 - 2020

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