The Value of Doing Nothing
When it comes to saving for retirement, sometimes the best course of action is to do nothing.
That is, doing nothing by not reacting to short-term market movements and volatility. Despite the market’s recent ups and downs, 60 percent of adult Americans said they were standing pat on their retirement savings strategy, according to the 2017 MassMutual Retirement Savers Study.1 Sixty-three percent of women and 56 percent of men were sticking to their guns.
Unfortunately, the study also found that only 23 percent of millennials were staying the course with their retirement savings, compared to 59 percent for those ages 35-49, 74 percent for ages 50-64 and 82 percent for ages 65 and older. So what were the other millennials who were changing their strategy doing with their retirement savings?
A third of millennials (32 percent) said they were moving more of their retirement savings into stocks and equities to potentially benefit from future growth, the study found. Meanwhile, a quarter of millennials (25 percent) said they were moving more of their savings into fixed-income investments such as bonds or money market accounts due to recent stock market activity. One in five was uncertain about what to do – they just wanted to do something different.
Clearly, there is a crying need for more education and guidance. Financial advisors know that time in the market is far more effective than trying to time the market. Morningstar reports that bad decisions by investors trying to time the equity markets reduce returns on average by 2.5 percent a year.2 In addition, the longer investors remain in the market, the better their chances of making money, according to data from Standard & Poor’s.3
So how can advisors, retirement plan providers and plan sponsors protect retirement savers from themselves? Are there strategies and tactics that can be employed to help savers stay the course and focus on their longer-term retirement goals?
Advisors, sponsors and participants have increasingly been discovering the advantages offered by investment strategies such as managed accounts and target date funds. The strategies can work well individually in retirement plans but also can complement each other to meet different savers’ needs.
TDFs, which reallocate assets to more conservative investments over time as the plan participant nears retirement, have become increasingly popular in recent years. Participants select an appropriate fund that is nearest to their planned retirement date. The assets within the fund are allocated to a combination of equities, fixed-income and other investments based on the time horizon to retirement. Investments are then reallocated along a “glide path,” which becomes more conservative as a participant approaches retirement. Investments in these options are not guaranteed and the investor may experience losses, including losses near, at, or after the target date. Also, there’s no guarantee that the options will provide adequate income at and through retirement
While age is the primary determining factor, other TDFs, also known as “lifestyle funds,” are allocated based on a participant’s risk tolerance with the same guiding principle of reallocating assets to a more conservative mix as the participant nears retirement. Age-based funds have recently eclipsed risk-based funds in popularity.
Managed accounts are built on the same principle of shifting assets to a more conservative mix over time but the actual asset allocation is unique to each individual. Assets are typically allocated based on each participant’s personal data, including the retirement account balance, contribution level, income replacement goal, age and other information. Like a TDF, the assets within a managed account are also reallocated over time as the investor approaches retirement.
Increasingly, advisors are recommending managed accounts as a way for plan sponsors to drive higher rates of savings and potentially enhance returns. A 2014 Morningstar study of more than 58,000 retirement plan participants showed that those enrolled in managed accounts or who received some kind of financial advice increased their savings rates by nearly 28 percent, boosting deferral rates to 10.1 percent from 8 percent on average.4 Compounded over time, that change in savings can have a significant impact on the total savings at retirement.
The findings are a bright light at the end of a long tunnel. Brighter still, MassMutual’s study found that millennials are more likely than other age groups to rely on investment strategies such as managed accounts. It’s a strategy worth promoting – encouraging more millennials and other retirement savers to embrace managed accounts and TDFs for retirement savings – and then do nothing.
E. Thomas Foster Jr. is head of strategic relationships for retirement plans for Massachusetts Mutual Life Insurance Co. (MassMutual).
1The MassMutual Retirement Savers Study, https://www.massmutual.com/about-us/news-and-press-releases/press-releases/2017/05/05/17/14/massmutual-retirement-savers-survey-april-2017
2Bad Timing Costs Investors 2.5 percent a Year, June 11, 2014, Morningstar, http://www.morningstar.com/cover/videocenter.aspx?id=650699
3Time in the Market is More Important than Market Timing, Chart, Based on S&P 500 daily total return data since 1928, https://seekingalpha.com/article/4043612-market-timing-vs-time-market
4The Impact of Expert Guidance on Participant Savings and Investment Behaviors, http://corporate.morningstar.com/us/documents/barrons/Expert-Guidance.pdf