How to prepare your clients for 401(k) statement shock

The 401(k) envelope, please — then again, maybe not.

Unlike the presenters at the Oscars or the Tony Awards, investors will be in no rush to tear open the envelopes when their monthly retirement account statements arrive in early July. The S&P 500 has dropped 9% from the May 31 close through the market’s big sell-off on June 13th, while the Nasdaq has sunk just over 10%.

And don’t expect the fixed-income side of most asset allocations to win any prizes either. Month-to-date, the iShares iBoxx High Yield Corporate Bond ETF and the iShares 20+ Year Treasury Bond ETF are down 8% and 5%, respectively.

So unless the Federal Reserve delivers some kind of miraculous Hollywood ending, 401(k) savers had better get ready for some serious statement shock. Their financial advisers, on the other hand, might want to steel themselves for some blowback.

“There will be some definite shock for sure. However, we have been preparing clients for this over the last three years of a very profitable bull market by setting expectations that corrections and volatility will return at some point. We are now at that some point in case you missed it!” said Jesse Clinton, managing director at Snowden Lane Partners.

PAPER, CYBER OR PDF?

Investors have been able to view their account balances online pretty much since the advent of the internet decades ago. Despite all that digitization, there remains a healthy portion of the investing public who still wait for that envelope in their "snail mailbox" to inform them about the state of their savings.

“Most clients wait on the mailed statements or for the PDFs to become available online. We do have some clients who check their online balances, and most are doing so every few days,” said Josh Strange, president of Good Life Financial Advisors of NOVA.

“Of course, we do have clients that check daily," Strange added. "But overall, my experience is that clients check their statements less in times of market volatility because it doesn’t feel good to lose money.”

Megan Riley, senior retirement plan adviser at Moneta, noted that many 401(k) providers don't send paper statements in order to be environmentally friendly. Instead, plan providers send emails to tell participants when their quarter-end statement is available online.

“Some plan participants check their accounts daily while others rarely or never check their accounts. I encourage participants to create an investment strategy and then only review their account on a disciplined schedule or as life events happen,” said Riley.

MONTHLY, WEEKLY OR DAILY?

Nearly all advisers say the best way to inoculate clients from the unanticipated anguish of viewing a depressed retirement account statement is to prepare them in advance. The best way to do that is through constant communication. The question then becomes: How constant?

Frank Reynolds, CEO of Frank Reynolds and Co., updates his clients monthly via a webinar “to prepare them for what’s happening, what we believe is coming and what our actions will be as we go forward.” Reynolds adds additional webinars during extremely volatile markets to keep clients apprised of the situation. 

“During the pandemic, we held weekly market updates for 16 weeks in a row,” he said.

Faron Daugs, CEO of Harrison Wallace Financial Group, touches base with his clients through weekly updates, pandemic or no pandemic. During market downturns, however, he tries to be proactive in reaching out to clients, to beat them to the punch before they open their statements or review them online.

“Before online account access features were available, it was a little easier to get ahead of that statement cycle and let people know what they should be expecting," Daugs said. "Now with online access on a regular basis, that is a little more challenging. However, they are always very thankful for the call and opportunity to address any concerns and keep them in the loop as to what is going on.”

Rob Shaker, portfolio manager at Shaker Financial Services, sends a daily market wrap-up to his clients to which they can reply. Shaker sees these missives as a way to educate clients about economic and market happenings, remind them of his long-term investing strategy and combat media commentary that might frighten them when volatility spikes.

“When markets get as choppy as they have been lately, and media and commentaries trend toward hyperbole, I think it’s important for advisers to do what we always do, and that’s stay in contact with their clients, particularly as it relates to reminding them of the merits of a longer-term view of markets and investing,” Shaker said.

DON'T LET THE PHONE RING

If and when a call arrives from a client traumatized by a monthly statement that showed an account balance far lower than what they expected, nearly every adviser warns against letting the phone ring. Pick it up and use the call as an opportunity instead.

“While the tenor of the conversation can vary greatly depending on their mindset, one common denominator for almost every client is that they have time on their side. And periods of negative returns — even significantly negative returns — are as common as they are unpleasant,” said Don Bennyhoff, chief investment officer at Liberty Wealth Advisors.

“Every client engagement requires a personal touch, so they feel like a person rather than a portfolio,” Bennyhoff added.

Snowden Lane’s Clinton uses the call to remind the investor of all the rebalancing, financial plan execution and cash management the firm has performed over the past few years that will enable them to hold their positions during down markets and remain tax-efficient. 

“Essentially, we were proactive during the spring harvest season to prepare for a tough winter. Now during the winter we need to add cash within the framework of each individual's financial plan and risk tolerance,” said Clinton. 

Said Moneta’s Riley: “I remind participants that most investment decisions are made based on two emotions: fear and greed. They should not make decisions based on fear in this down market, they need to be strategic and objective, and not change course. Sometimes it takes nerves of steel.”