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Fiduciary Duty During the Crisis

Justin C. Koebel

August 04, 2020

Employee benefit plan sponsors are facing many questions due to the coronavirus pandemic and COVID-19. One of the most important is simple: What is your fiduciary duty during the coronavirus crisis?

Given the depth of the crisis and the financial impact it’s having on many plan participants, it’s critical for plan sponsors to seriously consider this question. In particular, sponsors should be providing participants with proper guidance and tools when it comes to managing their retirement plan during times of heightened volatility and uncertainty.

Now more than ever, participants need help in making the best decisions regarding their retirement plan investments. This includes information and guidance to help them avoid making emotional investing decisions that could derail their long-term retirement strategies.

Your employee education and financial literacy efforts can be divided into three parts: risk, timing, and opportunity. Following is a closer look at each.

Beyond Risk Tolerance

Risk tolerance questionnaires are often used to gauge the level of risk that participants are willing to take with their retirement investments. However, this approach to gauging risk may not only be unsuitable, but also harmful for some plan participants.

A better approach for participants might be to gauge their risk according to three key dimensions:

  1. How much risk do they want to take?
  2. How much risk are they taking now?
  3. How much risk is necessary to reach their financial goals for retirement?

By viewing risk through this lens, participants may be more prepared emotionally when markets experience corrections, or worse. As a plan sponsor, you can better fulfill your fiduciary duty by providing tools that help participants better match their portfolio’s asset allocation with their true risk tolerance.

Maintaining a Long-Term Perspective

One of the biggest challenges that many plan participants face is keeping a long-term perspective with their retirement savings. This is especially true during times of crisis and extreme volatility. Nobody enjoys watching their retirement portfolio sink by 20% or more during a bear market. However, many participants could be reminded that short-term stock market drops will likely be little more than a blip on the radar when they begin withdrawing retirement funds decades later.

Even recent history is replete with examples of major crises and stock market plunges that were followed relatively quickly by rebounds and new market highs—from the 9/11 terrorist attacks, to the 2008-2009 financial crisis. Reminding participants of this history can go a long way toward fulfilling your fiduciary duty.

Capitalizing on Opportunity

When stock markets fall by 20-30% or more, it can be hard to see the silver lining. But market drops like this can present an opportunity for retirement investors who maintain a long-term perspective.

For example, U.S. recessions accompanying stock market drops that averaged 34% were associated with pullbacks that lasted an average of 15 months. On average, it takes 23 months for investors in these markets to get back to where they were before the pullback started.

In other words, investors who experience a 34% market drop recoup their losses in a little less than two years on average. The opportunity comes from continuing to make contributions to their retirement accounts during this time; because these contributions are purchasing securities at heavily discounted prices.

You can fulfill your fiduciary duty during the coronavirus crisis by educating participants, as well as offering default investment options like target date funds that make it easier for participants to take advantage of these opportunities.

Reassess Your Fiduciary Duty

Now is the time to reassess your fiduciary duty given the challenges of the COVID-19 — especially when it comes to participant education, communication, and guidance. Doing so could help you avoid problems down the road.

If you have any questions or need assistance on evaluating your fiduciary duty, please contact our team for a personalized discussion. We are here to help.

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