The economy is getting better, and so after seven years of near zero percent interest rates, the U.S. Federal Reserve raised its benchmark rate by 0.25 percent in December 2015. While it was a small move, the Fed promised more to come, and that can make a difference with 401(k) retirement plan account balances over time.
“It’s a long-awaited signal from the Fed that the economy has achieved a certain milestone,” said Alan Glickstein, a senior retirement consultant at Willis Towers Watson. “We’ve been in a period of abnormally low rates.”
For human resources professionals, the interest rate hike might alert some employees wanting to know what that means for their organization’s retirement accounts.
Historically, higher interest rates mean better returns on money market and other savings vehicles. That is good news for people near retirement who can expect to make just a little bit more in these conservative savings accounts.
For stocks and bonds, the interest rate increase could mean a more volatile market in the short term, while companies adjust to the new environment.
For workers looking to take money out of their 401(k) account, a rise in interest rates means they will be paying more for the loan. Reducing the amount in the account can be a setback to a worker’s retirement savings schedule, but it does help that they are actually paying themselves back with higher interest going into the account.
“Loans are a problem because they dampen long-term investment accumulation, even though you pay yourself back,” said Joe Ready, executive vice president of Wells Fargo Institutional Retirement and Trust.
In the meanwhile, HR professionals can do a lot to help employees through what they might see as a worrisome situation for their 401(k) accounts, according to experts.
In times of changing interest rates, it is important to offer multiple investment options to meet all employees’ individual needs, said Tim Walsh, managing director for investment services at TIAA, the financial services organization formerly known as TIAA-CREF.
“Make sure your investment lineup meets the needs of all kinds of investors but is structured to handle the changing dynamics of the market,” Walsh said.
Younger workers can stomach higher risk because they have more time in the market, but older workers nearing retirement need investments that can help protect what they have in their accounts.
“People aged 60 to 65 don’t have time to mitigate volatility,” Walsh said. “Employees need access to investments to meet the needs in their particular life cycle.”
Ready said that even though the interest rate hike was small, HR professionals should consider looking at their 401(k) plan investment options from four types of savers: Young workers, midcareer, near retirement and retirement. Looking at investment options this way can help identify gaps or possibly redundancies in the investment lineup that need to be addressed, he added.
“The rising interest rate will spark the employee to ask ‘What do I do?’ ” Ready said. “These four savers have very different needs as it relates to retirement plans.”
It isn’t enough to have a wide array of options, Walsh said. Access to education and advice is just as important. Communication, especially in times of changing market dynamics, is key. A 2015 TIAA survey showed that about a third of participants are not familiar with investment options available in their plan.
More plan sponsors are offering investment advice, according to Callan Associates’ 2016 Defined Contribution Trends survey. The January survey of 144 plan sponsors showed 88 percent offered investment advice in 2015 compared with 79 percent the previous year.
“Most participants don’t have the investment knowledge to make specific investment decisions,” he said. “There is a fear to doing this, and [HR professionals] need to show employees there is help available.”