The Impact of Market Volatility on Retirement Investing

Market Impact on Retirement Portfolios (Year-to-Date Declines):

• Defined contribution/401(k) investors holding target date, balanced, or asset allocation funds have seen portfolio declines ranging from 10% to 20%.
• Corporate pension plans, which shifted toward higher fixed income allocations recently, have experienced asset declines of approximately 8% to 10%.
• Aggregate system-wide corporate pension funded status (assets to liabilities) fell from 87% at the end of 2019 to approximately 75% by mid-March.
• Funded status partially recovered to ~80% by the time of the discussion but remained below the 78% level recorded at the height of the 2008 financial crisis (December 2008).

Strategic Recommendations for Investors:

• Short-term: Rebalancing portfolios is advised to correct deviations from strategic targets caused by the relative underperformance of equities versus fixed income over recent weeks.
• Long-term for 401(k) participants:
  • Younger investors may tolerate volatility to capture compounded results, avoiding the high costs of missing strong recovery days (e.g., late March).
  • Individuals nearing retirement are re-examining risk tolerance amid the systemic shift from defined benefit plans to individual responsibility.
  • Some participants are questioning if standard strategies suffice, seeking more customized or personalized asset allocation solutions.
• Long-term for Corporate Pensions:
  • Organizations may need to re-examine the governance structures of plans managed by finance/treasury departments rather than dedicated investment teams.
  • There is a trend toward ensuring dedicated resources and oversight are in place before market volatility occurs, not just during crises.

Provisions in the Congressional Stimulus Bill:

• Individual Retirement Savers:
  • Loan limits from retirement programs have been increased.
  • Tax relief has been enacted for coronavirus-related distributions.
  • 2020 Required Minimum Distributions (RMDs) have been waived to provide flexibility.
• Corporate Pension Plans:
  • Required contributions for 2020 are deferred until January 1, 2021 (subject to interest).
  • Benefit restrictions triggered by falling funded levels are temporarily lifted for 2020.
  • Sponsors may use 2019 funded levels to determine if benefit restrictions apply in 2020, effectively allowing them to "look back" at higher pre-crisis valuations.

Forward-Looking Implications:

• The stimulus provisions are characterized as a temporary "timeout" for plan sponsors and lawmakers, deferring immediate financial stress.
• There is no guarantee of permanent funding relief in the current legislation, as other priorities dominated the final bill.
• Plan sponsors and employer groups are expected to continue advocating for permanent pension funding relief throughout 2020.
• The temporary nature of the relief creates an opportunity for lawmakers to potentially revisit and extend pension funding measures later in the year.