Plan participants who make changes to their retirement strategies now in fear of being in a recession could lead to mistakes such as emotional investing, racking up unnecessary fees. And it could be much worse if participants take other, more drastic action, such as withdrawing all of their 401(k) savings to avoid a recessionary loss. However, understanding what steps to take and on what schedule can be very helpful to plan participants.
Lately we’ve noted an uptick in the word recession. It isn’t the frequency of its use that concerns us, it’s the placement. Many investment advisors and others in the financial industry often strategize about potential market changes and whether they indicate a mere dip or a prolonged downturn. In this case, the use of the word recession has been popping up more in the general media such as on podcasts and evening news discussion programs. While we know that talk of recession is a strong indicator of investor confidence concerns, (which makes it worth talking about) it’s a complicated topic. Getting it right is important.
Some financial analysts define a recession as merely being the opposite of economic expansion. In that sense, they describe the economy in a recession as deflating slowly like a helium balloon, lagging along towards the ground as time passes. Some investment advisors have worked at explaining recessions in more lofty and poetic terms, such as being a part of the lifecycle of a country’s economy. They sometimes even use an approach that may downplay the impact of those recessions. Plan sponsors don’t have to follow that approach. Plan participants often feel less anxious with specific facts and data. They may feel more confident about their retirement strategies (and thus continue to invest in them) if they feel informed about this topic.
That is why plan sponsors may want to discuss what a recession is and why some plan participants may be using that term incorrectly. A recession is a technical term. And technically, a TV pundit cannot announce that the United States is in a recession. In fact, there’s a joke about how often economic forecasters get recessions wrong. “Indeed, the standard way to disparage a forecaster is to point out that he or she has predicted 18 of the last 10 recessions.”[1]
That task has historically been done by a specific, nonprofit very nonpolitical research group that has been calling economic balls and strikes for more than a century, which is the National Bureau of Economic Research (NBER). [2] Some economists quibble with their findings as to specifics, such as when the Great Recession ended. Those economists sometimes find the work of the folks at the NBER to be too cautious.[3] Be that as it may, the NBER looks at more than merely the performance of the stock market or at inflation rates. Instead, they look at specifics of input, output, and performance. For example, they look at unemployment claims as well as increases in payrolls (which may indicate not only employment but also additional hours or wage increases).
Recessions, as an economic contraction, vary greatly. They have no fixed time period, though the consensus is they usually last at least six months. They can vary by scope and intensity as well. Back in the recession of the early 1980s, economist Geoffrey H. Moore (the so called “father of leading indicators”) stated “[a] rise and fall in some limited measure of economic activity, such as manufacturing output or corporate profits, is not enough. Nor is a mere slowing down or cessation of growth in total activity enough to qualify as a contraction.”[4] NBER looks for historical comparisons on three Ds: duration, depth, and diffusion of contraction in aggregate activity.[5] This isn’t something that a talking head on a cable news show or the average podcast guest can really assess. Just to reiterate, deciding when the US economy has entered into a recession involves data concerning aggregate activity across a broad spectrum often including indicators of personal wealth, such as investments and wages, business debt rates as well as gross domestic product growth. Some would like to simmer those details down into just a question of whether the GDP has fallen or dipped, but a determination of a recession involves more than just business income. It’s about people.
Plan sponsors often see articles and educational programs around recession-proofing their plans. Many times those offers come up when the economy seems to be headed towards a dip. And the timing of those programs is spot on. Best to prepare as if a recession is coming, even if the forecaster is, as they say, calling 18 of the last 10 recessions. This proactive approach is probably also helpful for plan participants too. They may want to consider how to recession-proof their retirement strategies. That doesn’t mean they necessarily should take steps ahead of time to do so. And that’s where plan participants can go wrong and need the help of their plan sponsors.
Plan participants who make changes to their retirement strategies now in fear of being in a recession could lead to mistakes such as emotional investing, racking up unnecessary fees. And it could be much worse if participants take other, more drastic action, such as withdrawing all of their 401(k) savings to avoid a recessionary loss. However, understanding what steps to take and on what schedule can be very helpful to plan participants. As one ERISA litigation expert noted, communication is often the hardest part of working through a recession, both for plan participants and for plan sponsors. “ERISA imposes a lot of communication obligations on plan sponsors, fiduciaries and administrators.”[6] He recommends thinking through communication obligations now, while systems can be tweaked for efficiency can lower the possibility of litigation risks later.
That means specifics about plan participation may be an area ripe for communicating. Participants may benefit from reminders about the plan’s details around changing savings amounts. That could include how to pause automatic paycheck transfers to 401(k) plans, how and when changes in paycheck withdrawals can be made, as well as the terms in a plan about hardship withdrawals. Plan sponsors can get ahead of potential recession problems by engaging in financial wellness surveys to identify areas of confusion as well as help pick up on growing areas of need.[7]
[1] What’s A Recession, Anyway? Edward E. Leamer available for download at: https://www.nber.org/system/files/working_papers/w14221/w14221.pdf
[2] https://www.washingtonpost.com/us-policy/2022/07/27/who-decides-recession and
[3] See https://www.brookings.edu/articles/who-decides-when-the-recession-ends discussing other economists.
[4] Name name name available for download here: https://www.nber.org/system/files/chapters/c0687/c0687.pdf
[5] https://www.nber.org/system/files/chapters/c0687/c0687.pdf
[7] https://www.psca.org/events/webcasts/upcoming/recession-proofing-retirement-plans
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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