Over the past few years participants have seen widely varied results in their retirement plans. First we saw tremendous drops in values, most notably in the fourth quarter of 2008. Much of 2009 experienced a rebound effect, with more volatility in both 2010 and 2011. This volatility has led participants to a point of confusion as to what they should do next. Following is a summary of the three stages of rebuilding:
- Stage 1: Emotional to Rational. For years participants invested with their emotions. This often led to increased risk by participants that wanted to make sure they were “getting their share” when the markets were strong. In some cases it also led to pulling out of the market well after they had dropped in value. In either case the investment decision was based on emotion and not on realistic goals for their future. Step one is for participants to set rational goals and understand and use the types of investments that can assist them.
- Stage 2: Inertia to Action. For too many participants the only thing they will ever do is complete an enrollment and withdrawal form during their careers. They feel they have no control over, or understanding of, their account. It’s important to remind them of their ability to choose, monitor and change their account. Original investments might need to be rebalanced or changed to something more appropriate. Participants need to take a more active role, for example sitting down with a financial professional for assistance.
- Stage 3: Short-term to Long-term. Those participants who do take an active role often spend too much time on short-term issues, such as market movement and economic indicators. If participants focused on long-term goals they could position themselves to take advantage of shorter term volatility. Thus a 30 year old investor who experiences a fund that drops 10 to 20 percent in value, may view it as a dollar cost averaging opportunity, instead of a reason to change strategy. Markets are always differing in their respective performance, but a long- term investment strategy can help build a pool of mutual fund shares that take advantage of market movement.
Perhaps the most effective way to communicate with employees about these phases is through education. Group meetings can spark interest, followed by an opportunity to meet with a financial professional on an individual basis.