The COVID-19 crisis is shining a spotlight on employer-sponsored retirement accounts such as 401(k)s. Long-standing rules have been relaxed, and investors have new options for making withdrawals.
These changes were put into law last month as part of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act.
Financial advisors are also being more proactive in helping clients with these employer-sponsored vehicles, which are usually held outside the investment accounts an advisor manages.
For starters, 401(k) account owners can now access up to $100,000 penalty free if they, a spouse or dependent suffer adverse consequences -- either health or economic -- due to the virus.
Also, 401(k) loan limits have been raised. "Before this crisis, loans were limited to the lesser of $50,000 or half of the vested balance in the participant's account," says Allison Brecher, general counsel at Vestwell, a New York-based retirement plan administrator.
"The CARES Act increased that to the lesser of $100,000 or the full present value of the participant's vested account balance. Loans, even from a participant's own retirement plan account, do need to be repaid, but the repayments (on outstanding loans) can be delayed by up to one year," she says.
Finally, 401(k) and individual retirement account participants turning 72 this year were required to start taking distributions, but the CARES Act allows participants to ignore that requirement. "This could help older workers stay in the plan longer, giving investments time to rebound, hopefully," Brecher says.
Financial Advisors' Role
Financial advisors typically don't directly manage 401(k) plans. Instead, advisors, through their brokerage custodians, manage mostly taxable accounts and IRAs. After an employee leaves a firm, either voluntarily or through a layoff or firing, his or her 401(k) is eligible to be rolled into an IRA, which a financial advisor can directly manage.
However, asset managers and financial planners can and do advise clients on these outside accounts. In fact, it's crucial to include employer-sponsored accounts in a comprehensive financial plan for the highest degree of accuracy.
Dimitry Farberov, an advisor with Miracle Mile Advisors in Los Angeles, says his firm is taking steps to ensure clients are well-positioned in their employer-sponsored retirement accounts. His clients are asking whether they should increase or decrease their contributions during the market turmoil.
"The question of what to invest in rarely comes up. Rather, the conversation stems around whether a client's overall financial situation affords them the opportunity to increase their 401(k) contributions during opportune times like these," he says.
Farberov says his clients tend to invest their 401(k)s in target-date retirement funds, which are diversified investment vehicles that allocate a range of investments automatically, according to a client's risk profile and expected retirement date.
Take Risk Into Account
Asset allocation should be decided with risk in mind. Before an advisor recommends an asset mix for a client, he or she should do some kind of risk assessment, based on factors such as age, estimated retirement date and the client's assets, both liquid and illiquid.
One popular tool that advisors use for risk assessments is Riskalyze, a software application that assigns risk metrics to a client's portfolio. These risk levels are based on factors including the allocation of stocks versus bonds, single stocks versus funds, and even the holdings within funds themselves.
Scott Krase, founder and president of CrossPoint Wealth in Lisle, Illinois, requires new clients to take the Riskalyze assessment. He is looking for three specific pieces of information: What risk does a client want to take, what risk he or she currently has, and what risk does the client need to achieve retirement goals?
The answers to these questions help determine a Riskalyze score ranging from 1 to 99, with 1 being the lowest. A risk level of 1 carries its own problems, as a client may not have enough invested in equity markets for the long term. A level of 99 typically means the client is taking too much investment risk.
Krase offers an example of how he might proceed after reviewing a risk assessment questionnaire.
"If a participant has a risk score of 55, then we design the allocation to stay within that score or range. This eliminates large losses in a portfolio," he says. "As for investment advice, we started to de-risk portfolios on Feb. 28. If someone was 80% stocks and 20% bonds, we either moved them or educated them to adjust their portfolios to 70% stocks and 30% bonds."
Guidelines for Allocations
While it's impossible for advisors to give specific investment advice on a broad basis, there are some general guidelines for allocating a 401(k).
Greg Klingler, director of wealth management for the Government Employees' Benefit Association, a nonprofit in Fort Meade, Maryland, says investors should "keep calm and stay invested," even throughout the COVID-19 crisis and market downturn.
Klingler recommends a three-step approach. First, he says, maintain a long-term mindset.
"Based on the measurement of each recovery since 1900, the average recovery time for a bear market in equities to return to bull market levels is about 3.2 years," he says. He points out that the definition of a bear market is a downdraft of 20% or more.
"So while you and your financial advisor should periodically assess and carefully consider rebalancing your portfolio, it's essential to remind yourself that you're not playing the day traders' game. You're investing for the long run and your long-term financial security," Klingler says.
Second, he reminds investors not to make hasty decisions about their 401(k) holdings. "Unfortunately, I've seen a great number of clients make emotional, rash decisions during market turbulence, only to see them quickly backfire, undercutting their long-term financial security and putting them on a very difficult path to recovery," he says.
Finally, he cautions investors about trying to outsmart the market by shuffling around their holdings in anticipation of what may perform especially well or poorly.
"Market timing -- the use of predictive tools and techniques to predict how the market may move and making investments accordingly -- simply doesn't work," he says. "Every bear market has historically given way to a bull market, and no one can predict when this occurs, so it's pointless to try."