Investing in Retirement Plans Post-COVID

Investing in Retirement Plans Post-COVID

The American College of Financial Services
October 6, 2020

As many Americans work with financial advisors to try to bounce back from the historic disruptions of COVID-19, a surprising finding to come out of the pandemic is that in many cases those who took a hands-off approach to managing their investment portfolios were better off than those who shifted assets in an attempt to beat the market.

In a recent collaborative venture that won the International Centre for Pension Management’s 2020 research award, Wealth Management Certified Professional® (WMCP®) program director Michael Finke and adjunct professor David Blanchett studied this phenomena in depth, including responses to the COVID-19 downturn, who may have been most affected, and what it means for the future of market-based assets.

For more from Michael Finke, listen to this interview.



You can view the full paper here and read about ICPM’s other research award recipients here.

Kyle Robertson: At the American College of Financial Services, our mission is to be your lifelong learning partner while we also strive to reach new communities and improve people's lives through applied knowledge and education for the benefit of society. This is made possible through the work of our expert faculty and thought leaders in a variety of fields.

Recently, our WMCP® program director, Michael Finke was part of a group of researchers who received an award from the International Centre for Pension Management for their look into portfolio delegation and 401(k) plan participant responses to the COVID-19 pandemic. And to speak more about that work and their findings, Michael joins me today. Thanks so much for coming, Michael.

Michael Finke: Thank you so much.

KR: As I'm sure many people listening know, COVID-19 has turned the financial planning field upside down, and those nearing retirement were hit hardest of all. Can you tell me a little bit about the research you conducted for the ICPM and for this paper, and what made you want to look into this specifically?

MF: Well, we had a very unusual situation that occurred in March of this year. The market dropped significantly, and I have done some research on the impact of recent market drops, such as the one that happened in 2008 and 2009 on investors and specifically plan participants. We've got really good data on employees in 401(k) plans who are saving for retirement.

As you know, the Baby Boomers are getting very close to retirement and they may be particularly sensitive to a drop in the market because that's going to have a big impact on how well prepared they are for retirement. So we decided to dig into the data and see what people actually did back in March.

KR: Interesting. And I know that one of the main aspects of this research was portfolio delegation, so if you could talk a bit more specifically about that, why is that such a big topic right now, and for your research?

MF: Well, it's a big topic because most workers save for retirement with some kind of instruments, like a target date fund where they don't have to control their investments. And if you think about the way that the 401(k) has evolved over the decades, it really evolved as a way for high-income executives to defer compensation and then morphed into a retirement plan for the majority of employees and the private sector. But the way it was designed originally, these employees had to manage their own investments, and that led to a lot of very predictable mistakes. People didn't save as much as they should have for retirement, and when they invested, they made a lot of the mistakes by chasing recent returns on mutual funds and getting in the market at the wrong time.

The record inflow in the market was right at the end of 1999, and in early 2000. And then everybody bailed out after the market crashed after that. So workers actually sacrifice retirement security by making big mistakes in their retirement account. I mean, that's not entirely surprising. They're not investment experts and the pension protection made active in 2006 made it easier for employers to automatically opt employees into these types of professionally managed automatic retirement savings plans. So now it's gone from a very small fraction of employees who invested in these lifecycle target date funds to more than half who are investing in these automated funds. And so what we wanted to see is of those who decided to delegate their investment management, did they actually feel compelled to make those changes in March after the market crashed? Did they decide to pull all their money out of stocks after the market had fallen and in March? And we then compared what they did to other employees who were not in these types of delegated accounts and who are managing their own retirement assets.

KR: So, I guess thinking about this topic and the things that you've mentioned, I can see maybe both sides of this issue, because personally, I feel like as a human being, I'm always compelled to put my hands directly on everything I'm involved in. It’s the whole, “If you want something right, you’ve got to do it yourself” mentality. But when it comes to finances, obviously I am not even close to being an expert, so I can't do it myself, but I can maybe understand why some people might not be comfortable with letting a computer program, robo-advisors, a company, or even a professional make investing choices for them, especially with the turbulence in today's market. What would you say to people who might balk at the idea of letting someone else, or in the case of a robo-advisor, something else make those kinds of decisions?

MF: If we think about how our brain processes a loss, we actually process it in the emotional part of our brain architecture. We kind of circumvent the rational part of our brain and move directly into the emotional response. And as it turns out, that's exactly what those who did not delegate did in March 2020. They were far more likely to pull their money out of the stock market after it had already fallen in March, whereas those who did delegate because they were relying on someone else tended to pay less attention when it wasn't their responsibility to manage those assets.

And those professionally managed portfolios after stocks rebalanced actually bought more stocks in March 2020, which was exactly the right thing to do in hindsight. Even less sophisticated investors tend to fall into this trap of wanting to pull all their money out of risky assets after they've fallen in value, and of course that's going to harm their performance over the long run. So we see very strong evidence that those who did delegate were far better off because they were not applying their emotions. They were not trying to take the wheel. After autopilot started steering them in a direction where they might've felt some sense of danger, autopilot corrected, and they ended up in a better place as a result of it.

So, this is one of the benefits, I think, of automating investments: that people no longer have to be in control. They have delegated that decision to someone else and because that someone else doesn't have the same emotional response, so you can end up with better outcomes, in particular for less sophisticated workers.

KR: And I know that in the past, I've heard you talk about needing to maybe look more toward being the “Vulcan” advisor who doesn't go necessarily with emotional reactions instead of logical choices: as a Star Trek fan, I love that, and it’s a good metaphor. But do you worry that at some point we'll all be just relying on machines to make financial decisions, and that cuts human financial advisors out of the loop?

MF: That's a great question. And I think especially when it comes to retirement savings plans, there is a force at work that actually protects workers, and that force is fiduciary protections. If these plans are not set up in a way that ultimately ends up benefiting the workers and their best interest, then they can sue their employer or whoever sponsored the plan. That serves as a very important mechanism to ensure that when these automated systems are set up, they're set up in a way that actually provides benefits to the workers.

Now, if there wasn't that fiduciary protection, there could be reasons to take advantage of the same investors. I mean, why not? If you're a company, and if they're not paying attention anymore, why not just take as much money as possible out of their pockets? But because of the unique nature of the retirement system that we have in the United States, they don't have to worry about it as much. But it’s an interesting philosophical question. If people get used to that and they’re in some sort of a situation where they're not given the same legal fiduciary protections, would they be vulnerable? I think they would.

KR: I also know that recently we've been talking a lot about The College’s 2020 Retirement Income Literacy Survey, which found that almost 80% of older Americans didn't have the financial knowledge they needed to make it through retirement on their own. So taking this and your own findings that you've talked about here into account, what do both of these things together mean for financial advisors going forward?

MF: You know, there's really a balance because we need to be realistic about people's financial knowledge, and we need to set up systems that can accommodate those who want to focus on their job. They don't want to have to focus on being a professional investment manager, so they should have the ability to leave that up to someone else and have an expert manage their money so they don't have to worry about doing it themselves. But of course, if we take away that responsibility, we also take away the incentive to learn more about finance. If you're not making mistakes, then you're not motivated to learn more about it. But we also know that especially once people retire, we need to take care of them to a certain extent. They become dependent on the rest of society if we don't do a good job of taking care of them, and there are predictable cognitive changes that happen as people get older.

So it's really the extent that we can automate. Some of these systems are going to make people better off, but at the same time, we want to create an incentive for them to remain vigilant and to understand some of these financial concepts so they can make investment decisions. They can make sensible savings decisions that are going to be in their best interest in the long run. So I think that's something that we're going to have to balance: this trend toward automation, along with enough of an incentive to maintain knowledge. But I think the bottom line is as policy, it's better that you should create guardrails for people who have not made that investment in knowledge, and yet also offer opportunities for those who are more knowledgeable to actually take the wheel if they want to. So put it on autopilot if you think that's probably in their own best interest, but at least give the more knowledgeable the option to steer it in a different direction. 

KR: So I'm 28 years old. I'm a young person whose only involvement in the stock market in any way is probably the retirement and 401(k) accounts that I have had through my jobs. For me and people out there like me, does this research suggest that we should in any way try to handle our own investments, or should we just sit back and let the professionals and the robo-advisors out there do it for us? Is there some kind of middle ground of knowledge necessary here for an optimal overall strategy?

MF: Well, I think in particular one aspect of automation in retirement is something that you do need to pay attention to, and that is: how much are you saving? A lot of retirement accounts default at a relatively low savings rate and research has found that, especially in today's low return environment, young people are probably going to have to save more. So pay attention to how much you are saving, give some thought to how much you're paying and what you're borrowing, and how you want to take your investments and use them to reach the goals that you want to reach in life.

But I think when it actually comes to investing, then it's often best to leave it to the experts. And even for those of us who are experts, it can be better to leave our own portfolios up to other experts because they’re less likely to make emotion-driven mistakes. So I think you can feel comfortable, especially in a well-regulated retirement account, delegating and leaving that part up to the experts, but you still need to maintain a certain amount of knowledge and awareness to understand whether you're actually doing enough to meet your long-term goals.

KR: I know we've talked about a lot of different things here related to your research and other current financial topics. Is there anything else based on the research that you've done and the work that recently won this award that you want to share with us?

MF: One of the things that we found is, especially if you're doing it on your own, you might find yourself in a position where you're taking more risk than you should. And you only are reminded of that when the market falls. Look at your statements on your retirement savings accounts. If you are managing your own assets, take a step back and look at what your asset allocation looks like right now. How risky is it? And is that an amount of risk that you're truly willing to bear? Especially if you have enough to meet your goals, it may be a good time to take some of that risk off the table, because what we found was that a lot of investors who were close to retirement that were taking a significant amount of investment risk were the ones that were most prone to pulling a large portion out of their retirement savings just at the wrong time.

KR: Michael, thanks once again for joining me today, and congratulations to you and everyone who worked with you on this research on your recognition and accomplishment.

MF: Thank you very much, Kyle.

KR: For more of the latest news about our programs, faculty, and all things regarding financial education, visit

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