Over the past year, terms like "meltdown" and "crisis" frequently have been used to describe our global financial markets. And if you're like most Americans, at some point those terms have become more than just impersonal headlines -- they've turned into first-hand headaches.
Even for the most seasoned industry veterans, recent market volatility has raised some difficult questions from clients when it comes to their 401(k) plans. Perhaps some have even questioned whether or not the 401(k) system is still valid as a retirement savings vehicle.
That's a scary proposition. But in the midst of the gloom and doom, if you look close enough, you'll see a silver lining for advisors who are prepared to seize the opportunity.
Unfortunately, when it comes to 401(k) plans, many individual participants aren't evaluating and adjusting their investment choices to match their risk tolerance and life stage. As a result, their risk exposure often exceeds their tolerance, leaving them with losses at the worst possible time. Witnessing those losses first-hand has unsettled many employers, who are concerned about the retirement security of their employees, as well as their own fiduciary risk exposure.
Understandably, emotion has clouded the perspective of these plan sponsors and participants, revealing a need for better education and advice. In fact, it's exactly at uncertain times that people most need sound, objective advice. Therein lies the silver lining for advisors.
During this period of extraordinary market volatility, advisors have a perfect opportunity to educate clients about market risk and introduce them to risk-minimizing options within 401(k) plans. What may come as a surprise to many employers and their employees is that most leading retirement providers already offer these solutions. Yet, many of these solutions have been ignored in the name of higher-risk, higher-return investments -- until now.
Suddenly, plan sponsors and participants are seeking safer investments and guaranteed returns, marking a paradigm shift in the 401(k) mind-set from high risk to managed risk. And the advisors best positioned to offer risk-minimizing options will also be best positioned to win.
For example, take guaranteed accounts and managed accounts -- two options already offered by many leading retirement providers. As their name implies, guaranteed accounts (also known as fixed income or stable value funds) offer a guaranteed rate of return with no exposure to market risk, meeting the needs of participants who desire a risk-free 401(k) experience.
On the other hand, managed accounts provide numerous advantages to 401(k) plan sponsors, as well as to plan participants who are willing to accept some degree of risk in an attempt to generate higher returns. The following are a few of the advantages offered by managed accounts, particularly when it comes to investing during volatile markets:
- Customized advice - Managed accounts allow individual 401(k) participants to receive customized advice from a registered investment advisor based on their retirement goals and tolerance for market risk. When participants elect the managed account option, they work with the RIA to map out a personalized strategy. Once that occurs, they can take comfort knowing their money is being actively managed by an expert according to their individual circumstances.
- Fiduciary protection - Managed accounts can serve as a Qualified Default Investment Alternative and reduce fiduciary risk exposure for advisors and plan sponsors. Because an RIA offers ongoing investment advice on behalf of the participants, the RIA assumes the fiduciary obligations associated with providing that advice, which reduces the risk to the plan sponsor and advisor.
- Emotion-free investing - Far too often, plan participants allow their emotions to dictate their investment decisions, placing their retirement savings at the mercy of market upswings and downturns. Knee-jerk reactions lead many participants to buy high and sell low -- the opposite of sound investment strategy. By electing the managed account option, participants benefit from the objective advice offered by RIAs, who often use sophisticated tools to assess the market's historic performance and allocate assets according to the participant's risk profile and investment objectives. Ultimately, this allows participants to capitalize on market upswings, while minimizing the impact of downturns.
Recommending retirement plans that offer these risk-minimizing options is a great first step in helping clients transition from shock and disbelief to opportunity. The advantages offered by solutions like managed accounts are exactly what your clients are looking for -- they just need someone to point them in the right direction. In the midst of a "crisis" and "meltdown," clients need sound advice -- and a trustworthy advisor.
David Ahrendt has worked in the retirement plans industry for more than 25 years and is senior vice president of retirement plans at Mutual of Omaha. He can be reached at dave.ahrendt@mutualofomaha.com.
