The problems surrounding the Year 2000 issue (Y2K) are widely reported, and by now most business owners have strategies in place to deal with these issues. Theres one area, however, for which many of you still may not be prepared: The effect Y2K may have on the stock market and, consequently, on your companys retirement savings plan.
Defined-contribution plans (this typically includes 401(k) plans, but can be any plan for which the employee selects the investments) have become a major source of retirement savings for employees. As employee participation in defined-contribution plans has grown, so too has the proportion of assets invested in equities. Many employees have only experienced a rising market. As a result, they may not be prepared to handle a market downturn. This is where you must step in.
Fiduciary liability is the reason business owners need to be prepared. Having a strategic plan in place to deal with a potential market downturn as a result of Y2K shows fiduciary diligence. Even though you cant predict the market, you still can be responsible and limit your liability by planning for this possibility.
What will happen if a market downturn does occur Jan. 1, 2000? The results of a survey conducted recently by William M. Mercer, Inc. suggest that employee confidence will erode, leaving many employers rushing to deal with these concerns. This is where investment education programs become the crucial part of a strategic plan.
If your company or the vendor of a defined-contribution plan already provides investment education programs, its important to include specific details regarding market downturns. You should address the following:
- Long-term investment strategies
- Risk/reward trade-off
- Portfolio building, asset allocation, and diversification
- Performance history of the retirement plans investment options
- Performance history of different asset classes and investment styles
- Investment strategies at different life stages
These topics must be covered in addition to the basic topics, such as an explanation of company retirement plans; how to estimate income needed for retirement; an explanation of basic investment concepts; an historical analysis of the different asset classes (stocks, bonds, cash investments) over five-, 10- and 20-year cycles; the attributes of each plans investment option; the importance of asset allocation decisions and how to make those decisions; the benefits of dollar-cost averaging; and the impact of pre-retirement withdrawals on retirement income.
I would advise, however, that you, as the employer, need to put more emphasis on risk tolerance and risk/reward trade-offs, as well as on issues and events shaping current market trends in your investment education message.
Even if Y2K has no effect on the stock market, you should remain proactive in keeping your defined-contribution plan participants educated, informed and satisfied. Louis P. Stanasolovich is founder and president of Legend Financial Advisors, Inc., a fee-only Securities and Exchange Commission-registered investment advisory firm located in the North Hills that provides asset management and comprehensive financial planning services to individuals and businesses. Reach him at (412) 635-9210. The firms Web site is www.legend-financial.com