Navigating market volatility: Strategies for defined contribution pension arrangements

Turbulent economic conditions and how employees respond to them can create sustained financial vulnerabilities for organizations with defined contribution (DC) retirement plans. Professional management of retirement plans can help employers overcome these challenges, supporting effective workforce planning and protecting the value of the investment they are making in their people through plan contributions. This means employers can focus on what they do best — running their business.

Overview

In the current climate, market volatility is a reality we must face head-on. Employers need to navigate a myriad of business challenges driven by geopolitical tensions, fluctuating trade policies and economic uncertainties. At the same time, their employees are worried about their own financial futures.

For those in DC plans, where retirement outcomes are closely tied to investment performance, these concerns will be particularly acute. And in volatile markets, this has real potential to impact business performance for plan sponsors.

Employers must ensure that their plans are well-equipped to support members through turbulent conditions, allowing them to focus on navigating these same challenges for their business. Combining strategic global oversight with locally executed solutions, working with existing providers where appropriate, can be an effective way for employers to help their DC arrangements stand up to adverse conditions across these three critical areas:

1. Member engagement strategy
2. Investment design
3. Operations and governance

1. 01

   Member engagement strategy

   Effective communication with plan members is essential during periods of market volatility, and clear and reassuring messages are crucial. When members are well-informed and clear on their later life financial goals, they are less likely to need to delay or change their intention to retire, allowing organizations to plan their workforce needs more effectively.

   A well-rounded, effective strategy includes the following three elements:

   • In-the-moment interventions to mitigate against short-sighted decisions: It is important that employees remember the time horizons of their retirement plans, which are often long-term and designed to withstand short-term market fluctuations. Employers should encourage employees to align their investments with their time horizons and avoid making decisions based on market volatility alone, which at times may lock in losses. Targeted communications can mitigate against knee-jerk reactions provided these interventions are executed quickly. While the scale and technology capabilities of larger retirement providers can offer the necessary bandwidth, it's also important that employers are able to customize and/or supplement messages to meet the needs of their workforce.
   • Focusing on long-term goals to support retirement readiness: Powerful engagement strategies find ways to connect people with their DC plan in a meaningful way that resonates with their aspirations for retirement. Simple, intuitive modelling tools can bring these concepts to life in a way that helps members understand their DC plan as a long-term investment. These tools can provide reassurance to members that short-term fluctuations are part of achieving their long-term goals.
   • Considering broader employee financial wellbeing and resilience: To have the most impact, it's vital to encourage members to consider their wider financial situation. Creating and maintaining a broad library of material can be onerous for individual organizations and so using an external partner is a way to lighten the load while looking out for your employees. This can be supplemented by individual guidance or advice which considers assets outside of the retirement plan and the member's personal circumstances. Helping members see the bigger picture improves financial resilience, reduces anxiety about current events and supports better financial outcomes.

1. 02

   Investment design

   Bouts of volatility are expected in public markets. While the current outlook is particularly uncertain, saving for retirement is about building wealth over the long-term and investors have typically been rewarded for staying in markets rather than selling at times of market distress.

   Employers are often making significant contributions into DC plans alongside their employees. Well-considered DC plan investment designs help organizations protect the value of the investment they are making in their people. Look out for these features in particular:

   • Aligning risk with members' time horizons and circumstances: Younger members with longer time horizons can tolerate short-term volatility in pursuit of higher long-term returns. Conversely, as members approach retirement, managing volatility becomes more important. This is achieved by introducing a broader range of diversified asset classes and, in the final few years, allocations to assets that reduce volatility while still aiming for positive real returns. As a result, younger members have the chance to maximize returns over the long term while older members are protected from negative market movements at a time when they are looking to cease contributing and start spending their retirement savings, helping them keep their retirement plans on track. Organizations should ensure plan providers offer these types of strategies where possible along with suitable default investment choices.
   • Leveraging scale for innovative investment design: Larger retirement providers have the advantage of scale, which can significantly benefit members through more innovative investment design at low fees. These solutions, which include access to parts of the market that are traditionally only available to institutional investors, can contribute positively to performance and help manage risks, particularly during periods of market volatility.

1. 03

   Operations and governance

   Economic uncertainty can add to the burden of retirement plan governance and operations at a time when it's critical for organizations to be focusing on their core strategy. Delegating demanding responsibilities such as investment governance, provider selection and member communications to trusted specialists helps prevent DC plans becoming a distraction or liability during economic headwinds.

   The commercial buying power and technology capabilities of larger outsourced providers can also maximize value for both plan sponsors and members, which is particularly welcome in the current climate.

   • Let the experts handle the complexity: Market volatility usually means a spike in activity across investments, communications and fiduciary matters. In employer-managed arrangements, the additional work can fall to internal teams that may lack the capacity or specialized knowledge to deal with it. In an outsourced arrangement, the burden is typically absorbed by the solution provider. Regular reporting and data insights shared by trusted DC specialists take away the noise of day-to-day management and equip sponsors with valuable, actionable information about their workforce.
   • Consistent quality oversight: When markets are choppy, plan oversight and operations matter. Even with the best of intentions, the attention of plan sponsors can easily drift when economic and market volatility prompts firms to turn to evaluating broader business risks. Where some or all of the plan management is delegated, employers can remain confident that experts are maintaining consistently high standards of oversight and governance, striving for better retirement outcomes for members on their behalf.

Conclusion

Market volatility is part of investing. Right now, this is creating particular challenges for employers managing DC pension arrangements, who are worried about cost control, risk management and taking care of their employees. Targeted outsourcing to trusted specialists who have the expertise and scale to solve for these issues means organizations and their employees can navigate uncertain times with confidence.

Disclaimer

Towers Watson Limited (trading as Willis Towers Watson) (Head Office: Watson House, London Road, Reigate, Surrey, RH2 9PQ) is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA Register Firm Reference Number 432886, refer to the FCA register for further details) and incorporated in England and Wales with Company Number 05379716

This material is based on information available to WTW at the date of this material or other date indicated and takes no account of developments after that date. In preparing this material we have relied upon data supplied to us or our affiliates by third parties. Whilst reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and WTW and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any errors, omissions or misrepresentations by any third party in respect of such data.

This material may not be reproduced or distributed to any other party, whether in whole or in part, without WTW's prior written permission, except as may be required by law. In the absence of our express written agreement to the contrary, WTW and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable.

This material is intended for investors with long-term investment time horizons. The value of all investments and the income from them can go down as well as up. This means you could get back less than you invested. Past performance does not predict future returns.

Contact

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Alice Koerner

Head of LifeSight Savings Solutions

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