Working as we do almost exclusively with companies and individuals in the design and implementation of qualified retirement plans, when we review the performance of participant positions, ours included, within retirement plans, be they defined benefit or defined contribution, the impact of sell-off is startling.
This is the first recent correction, and we have been working in the retirement plan arena for almost a quarter of a century, where there has been no safe harbour in which to seek shelter from the typhoon effect currently impacting the markets.
As we have a fiduciary responsibility to plan participants to, among other things, provide them with sufficient education to allow them to make informed choices, there are some strategies you might consider when offering advice to your retirement plan sponsors and participants:
- The markets reached their last 'bottom' on Oct. 9, 2002;
- The markets reached record levels on Oct. 9, 2007;
- Which means retirement plans experienced nearly sixty consecutive months of positive performance.
So, perhaps we should begin by reminding plan sponsors and participants that they should focus not quite so much on the immediacy of the present as they should on the history of the past.
In times like these, and historically downturns in the market have lasted for 401 days, there is a tendency for plan participants to stop deferring with every intention of resuming the funding of their retirement when the markets start to stabilize.
Does this sound like a prudent course of action?
Or, does it sound more like trying to time the market?
Perhaps you might, as we have, emphasize to your retirement plan sponsors and participants alike that instead of trying to time the market (short term) it is better to spend time invested in the market.
Using the S&P 500 Index as our benchmark, for the period 1988 through 2007:
- There were two sustained market rallies, from 1995 through 2000 and then again from 2004 through 2007; and,
- There was one measurable correction from 2001 through 2003.
Using those time periods:
- If your plan and its participants had remained invested for that entire period , their average annual return would have been 11.8 percent;
- If your plan and its participants had 'missed' the 10 best days of market performance during that period, their average annual return would have been 9.20 percent;
- If your plan and its participants had 'missed' the 20 best days of market performance during that period, their average annual return would have been 7.1 percent; and,
- If your plan and its participants had 'missed' the 50 best days of market performance during that period, their average annual return would have been 2.33 percent.
So, when working with plan participants and plan sponsors, a longer perspective might prove prudent.
Colin Smith can be reached via e-mail at rr1058@aol.com.
