Protecting Retirement Plan Participants from Risk of Large Investment Losses

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There are many mechanisms that you, as a Plan Sponsor, can implement to insulate yourself from the liability associated with participant investment selection.  But what are you doing to add value?  How are you helping to protect participants from making bad investment decisions?  How are you helping participants avoid the risk of large losses?

The modern participant-directed 401(k) plan has asked millions of unsuspecting workers become expert investors.  As demonstrated by the popularity of ‘auto-invest’ options like target date funds, it is also very apparent that many don’t want, or aren’t comfortable with this responsibility. Most plan participants aren’t versed in the concepts of modern portfolio theory, and even fewer truly understand the instruments they are investing in.  [Want proof?  Just ask an indexer what securities lending is.]  In other words, most retirement plan participants are savers, not investors.   There is, however, one universal concept that everyone does understand–am I making money, or am I losing money?

Behaviorally, humans are hard-wired for loss aversion.  When faced with large losses, many tend to make the exact worst possible decision (sell the low and sideline the cash until they’ve missed the rebound).  Thus, muting volatility and smoothing returns over time can help to shift plan participants’ focus from day-to-day investment fluctuations to their most important job–saving.  Even the DOL recognizes this.  In the 2013 publication Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries, the DOL States:

“Added expenses…for access to special investments that can smooth returns in uncertain markets may be worth it

Furthermore, auto-invest options like target date funds have historically done a poor job of protecting near-retirement employees from the risk of large losses.  See the chart below from Morningstar to see how the 2010 vintage funds performed in the 2008 market sell-off.  Many of the target date fund providers have indeed made changes since ’08 to help avoid major 2008-like draw-downs.  Then again, how can we be sure?  Memories begin to fade eight years into a bull market.

In an interesting article from the Swan Global Investments blog (linked below), Marc Odo uses ‘sober & rational mathematics’ to make the case that “outperforming the market becomes much easier if losses are minimized in the first place.”  As outlined above, the application of this ‘winning by not losing’ concept is nowhere more relevant than within corporate sponsored retirement plans.

The Importance of Avoiding Large Losses


The opinions expressed are either those of Gordon Asset Management, LLC (GAMLLC) and subject to change without notice, or were developed from sources believed to be providing accurate information. This material is not financial advice or an offer to sell any product. Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. GAMLLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Gordon Asset Management is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. More information about the adviser, its investment strategies and objectives is included in the firm’s Form ADV, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

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Todd Zempel, known as "Z", has over 12 years of extensive industry experience. Prior to taking over retirement plan operations for the Gordon Asset Management, Z spent a decade as a TPA and record-keeper. Z holds the Accredited Investment Fiduciary Analyst (AIFA) designation Qualified 401(k) Administrator (QKA) designation, and is a Certified Plan Fiduciary Adviser (CPFA). Z was voted one of the nation’s top 50 retirement plan advisors under the age of 40 in 2015.