By Tom Kret
Per the cliché, “truth is stranger than fiction,” few could have predicted the catalyst to bring the longest bull market in history to an abrupt about-face would be a virus with a name synonymous with a popular imported beer.
Just prior to the historic sell-off, much attention was focused on the SECURE Act, which promises to change the landscape of today’s retirement plans over the coming years. It has important implications in these times.
One of the provisions in the SECURE Act involves an investment concept in existence for decades that has been rarely utilized by plan sponsors. Known as “guaranteed income” programs, the SECURE Act provides “safe harbor” protection for employers offering such a program in their retirement plans.
When the permanent pension was the norm, a retiree with a pension could know that a check was coming in every month for as long as they were alive. Guaranteed income programs emulate these desirable features of the permanent pension within a 401(k) plan.
Those who have chosen a program that provides the assurances of guaranteed income for life would likely be more inclined to stay the course and remain invested when the inevitable “bear market” occurs, confident that their income in retirement would not be affected during declines in the market. Staying the course should lead to better long-term investment outcomes based upon historical data on the markets over the last three decades.
For example: Over the last 30 years through March 20, 2020, an investor who missed the 10 best days of returns would have earned just 6.20% instead of 8.84% annualized over the 30-year period. If the investor missed the best 30 days, they would have earned only 2.95%. In missing the 30 best days, a dollar would have grown to just $2.39 instead of $12.67 by staying fully invested.
This is based on data from Northern Trust Research and Bloomberg. Charts show the annualized compound return and growth of $1 using daily return data on the S&P 500 Index over the past 30 years ending March 20, 2020, assuming the (0,5,10,20,30) best returning days are excluded from the sample.
Another reason to consider offering guaranteed income programs in a 401(k) plan is that they mitigate two key risks all retirees face. Those are (1) sequence of return risk and (2) longevity risk. Please click here to read a detailed description of both risks.
For over three decades, as a Senior Retirement Plan Consultant, I have focused on assisting employers and their retirement plan participants to accumulate assets for their retirement. Call me today to discuss how guaranteed income programs, combined with the strength of the Madison-based Burish Group of UBS, can help assist your employees to retire with dignity and in the lifestyle they envision.
Kret is a supporter of the Tech Councils of North America (TECNA), which includes the Wisconsin Technology Council and about 65 similar organizations.