ust a few years ago when companies were putting the brakes on traditional pensions and driving a massive portion of the workforce toward 401(k) plans, employers couldn't have asked for better timing. The economy was rebounding from a relatively brief recession and the equity markets were en route to all-time highs. Participation rates also were escalating steadily, and scores of workers were given the chance to feel confident about their ability to make sound investment choices.
Now, more than ever, workers have every right to question the merits of the 401(k) system—and the basic tenets for forming a so-called fundamentally sound investment portfolio. Workers lost billions of dollars in their retirement accounts last year.
And no portfolio—no matter how diverse—held up amid an unforgiving economic environment. At the same time, many plan sponsors have been forced to stop matching their workers' 401(k) contributions in a bid to conserve cash and shore up their businesses.
It's a new perfect storm of sorts, as many workers have become skittish of equity markets while also losing one of the premier incentives for participating in their 401(k) plans: free money.
Corporations that sponsor 401(k) plans may have more pressing issues at the moment, but that hardly means they should ignore the waning confidence in what has become their primary retirement benefits offering. Because if employees stop participating now or start investing their money imprudently, it could take years for workers just to claw their way out of the hole—if they can dig themselves out at all.
To avoid this potential outcome, here's a quick check list of to-do's and tips for employers and benefits officers this year.
1. Communicate—now. "Employers need to get out in front of workers as soon as possible, if they haven't already, and remind them why it's critical to stay the course and keep participating," says Pam Hess, director of retirement research at Hewitt Associates. She notes that it's certainly more of a challenge now to be persuasive, not to mention credible. But employers should hold town hall meetings, webinars or educational seminars—whatever forum will most effectively reach workers—"to remind your employees that that they're not on their own," Hess says. This means also reminding workers about the financial education or advice programs that are available to employees and encouraging them to take advantage.
2. Put it in perspective. "Companies have to try and help employees see that this is part of a cycle," says Matt Smith, head of the defined-contribution practice at Aon Consulting, "even if it may be a very extreme part of the cycle right now."
Smith contends that plan sponsors can, and should, still make the case for diversified investment portfolios even if nearly every asset class has taken a major hit. That means for most workers, a mix of U.S., international and emerging-market equities should still account for the majority of their 401(k) assets. And given the major declines in each of these markets, now is an ideal time to rebalance 401(k) portfolios to reclaim—at a considerable discount, no less—a more substantial allocation to equities. "What's the alternative to a diversified portfolio? Taking a concentrated bet?" asks Smith. "These are still long-term savings vehicles, and employers need to re-emphasize that point with their participants."
3. Don't get defensive. Participants moved about 10 percent of 401(k) assets out of equity funds and into more defensive investments—such as stable-value funds—that yield steady but often puny returns. "It's a natural reaction for participants to sell equities when equities are at or near the bottom and buy when they're approaching the top," Hess says. "While it may make participants more comfortable to be in safer, less volatile asset classes, their portfolios won't have enough firepower to accumulate an adequate retirement savings." Plus, employers should underscore that moving into defensive funds at the expensive of equities turns unrealized losses into actual losses. "By panicking, you're locking in losses and taking steps backwards," Hess says.
4. Meeting your match. While many companies are no longer able to pony up and match workers' contributions, employers need make it clear that this is usually just a temporary step. "Most companies need to explain that it will bring the match back as soon as possible," Smith says. "Companies need to conserve cash, and having your match frozen is better than losing your job."
There are other benefits that still exist, such as tax-deferred savings and institutional pricing on mutual funds, and employers should emphasize that the match isn't the only reason to participate in a 401(k) plan.