PLANSPONSOR - April/May 2021 - 14

UPFRONT
Managing Risk in DC Plans
OVER THE PAST 30 years, half of the
markets' highest-volatility days were in
2020, notes Jeremy Stempien, principal,
portfolio manager and strategist for QMA,
a PGIM company.
Christine Stokes, head of institutional
and retirement learning and development
at Nuveen, believes volatility will
be lower on average over the course of
this year but mentions two recent unrelated
spikes: One was sparked by the
GameStop incident, and the second was
due to concerns about rising interest rates.
" We'll see spikes like this over the course
of the year, but, on average, there will
be better growth, which will translate to
higher earnings, and the Fed will hold the
line, " Stokes says.
From a defined contribution (DC)
plan participant standpoint, volatility
can be a risk, but it can also be a benefit,
Stempien says. It is a risk for older participants
who have less time to recover, and
it could cost them a year of retirement
income, he says. But younger participants
can benefit from dollar-cost averaging, as
they can buy when the markets are low.
It is important for plan sponsors
to have conversations with plan participants
about market volatility, says Stokes.
" Volatility and uncertain markets can
cause panic and emotional investing
moves. Participants can forget about their
long-term time horizons, " she says. " Plan
sponsors are on the front line of that, so it is
important to educate employees about how
to think about it and what steps to take. "
This education should be provided
regardless of the level of market unrest,
she continues, but, in such periods, the
key is for plan sponsors and participants
to remember the long time horizon that
most investors have. " When the market
bottomed out [last] March 23, some individuals
pulled out. However, professional
money managers used that as an opportunity
to rebalance, so they were able to
take advantage of buying low and able to
14 PLANSPONSOR.COM April - May 2021 Art by Jarett Sitter
[capitalize on] the upside of the market in
subsequent months, " she explains. " Those
who moved out of investments didn't see
these advantages. "
Fiduciaries doing their due diligence
on investments might already have the
practice of delving into asset managers'
capabilities. Stokes says, in times of market
volatility, plan sponsors should augment
this research with studying the asset
manager's views of the market.
Anytime sponsors are reviewing asset
managers, they need to understand the
time horizon for investment strategies and
how they manage up and down markets, "
she suggests. " What are their expectations
for their investment strategies' performance
during those times? Does historical
performance align with what they're
expecting? Do expectations come to fruition?
Look at periods of volatility and how
the investments performed. If they didn't
perform the way the investment manager
expected, why not? " -Rebecca Moore
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