What Does COVID-19 Mean For My Employer-Sponsored Retirement Plan?

Does the pandemic change our contribution strategy for 401(k)s or IRAs? Kristen Donovan explains what savers should keep in mind.

Transcript

Tim Maurer:
Hello, Tim Maurer back with another episode of Ask Buckingham, a new video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today’s questions will be answered by Kristin Donovan, director of retirement solutions at Buckingham Wealth Partners. And Kristin, times are scary in the midst of this COVID-19 crisis. Should I stop making 401(k) contributions?

Kristin Donovan:
We’ve actually heard that question a lot, Tim, and it’s very understandable to feel insecure when everything around you is shifting and nothing seems normal right now. But if you can afford to continue to make those contributions, I would actually challenge you to think about that in a different way. For a lot of us that are salaried and so blessed to still be working right now, a lot of us has found ways to increase the amounts that we’re saving right now.

Kristin Donovan:
Certainly if you can’t afford to do that, then there are options available to you. First of all, you can always drop your contribution level to zero. Just reach out to your HR department, the service provider, log into your account. That is an option for you should you fall upon hard times. We’re all in different boats in this situation right now, so I’d like to speak to everybody on each end of the spectrum. If you can’t afford to contribute, absolutely. If you don’t want to contribute just because you’re afraid of what’s going on in the market, then I want to reframe your thinking. I’d like to actually reframe it so that you think about what a bargain things are right now if you’re investing in stocks.

Kristin Donovan:
So Warren Buffet is famous for saying, “Be fearful when others are greedy, and be greedy when others are fearful.” So I think right now in this time of what feels kind of like chaos and so much noise in the market and people are feeling like everything’s kind of coming down on them, this is the time, if you’re able, to actually be a little bit greedy. If you look at stock, for example, over a period of time, I’d like to challenge people to think about this and maybe compare it to something like shopping that we all do. So do you determine that you want something and that it’s a good purchase for your family, would you rather pay full price for it or would you rather buy it when it’s on sale? I think that’s an important thing to keep in perspective. And if you think this market’s coming back like it has in the past, then this is the time to take advantage of that.

Kristin Donovan:
And if you can afford to, that means saving a little bit more. If you can’t afford to, there are little things. For example, I logged into my IRA and saw that I had some unreimbursed dividends. I went ahead and use that to buy money, to buy some investments in my IRA and beef up the equity exposure at that point when things were down. And then on the other side of the spectrum, my kids are young adults and they have Roth IRAs. And when everything was crazy and their birthdays were at the end of March, I said, “Hey guys, how about not presents this year? How about deposits into your Roth IRA?” They have jobs, but they don’t make enough money to pay taxes yet because they’re in school. So we decided that was the way to go. And they grew up in my house, so they understand that that is something they should be looking to do anyway, so they were excited about that option. So be a little bit creative.

Tim Maurer:
Yeah. I’d love to see how that conversation went. I wish we had a YouTube recording of that. But you mentioned something very interesting that, indeed, if someone is salaried and fortunate enough not to have experienced a reduction in their income, and I’m looking at my monthly bills and indeed we’re spending less because we’re not going out as much. And so you may actually have some additional cash on hand. But this is also a time of uncertainty, right? And in times of uncertainty, we might feel like we just need to warehouse some additional cash. If I don’t have much money saved in terms of an emergency fund, like a cash emergency fund and checking or savings, should I stop making contributions now and consider creating an emergency fund if it doesn’t exist?

Kristin Donovan:
Absolutely. It sounds so counterintuitive to me because my whole life is retirement plans and I’m a huge fan of everybody saving for retirement. But if you don’t have that emergency fund, that emergency plan in place where you have some money to tap into, which a lot of Americans don’t, then I would shift focus. Take a look at your budget. Maybe you’re not paying a gym membership right now. Maybe you’re paying less for gas because you’re working from home. Shift some of those dollars into an emergency fund.

Kristin Donovan:
One of the things that I would challenge people to really think through, because a lot of times people have the best of intentions, but one of the reasons why saving an accompany retirement plan is so successful for people is because their employer prompts them to do it. They fill out the paperwork, they go online and it’s all automated and they never have the chance to spend that money, and they really don’t see it. So use that same functionality to be successful in building your emergency savings. So for example, if your money from your paycheck is deposited right into your checking account, make sure that very same day you have an automated transaction to flip that around and move that into your savings account so that you don’t see it, you don’t have the chance to spend it.

Tim Maurer:
Yeah. And that’s the one challenge if you turn off those automatic contributions to the 401(k) and divert them elsewhere, you become a creature of habit. And you have to remember almost, set yourself a reminder, I use my iPhone all the time, set a reminder for three months down the road to turn that back on so you don’t miss out on those opportunities for the future.

Tim Maurer:
Now, let’s say your income sources are sound, but you’re looking at your portfolio in your 401(k) wondering if you should be doing anything differently. We often talk about the benefits of rebalancing in a portfolio, taking from assets that have done well to divert them to the assets that may have done poorly. This is especially a good habit to be in in the midst of market volatility like we’ve seen recently. How do I know if my 401(k) is automatically rebalancing? Or is this a good thing in the first place?

Kristin Donovan:
Yes. So that’s a good point, especially when you’re trying to do the best you can with what you have. Maybe you don’t have a lot of extra money, but we want to do a good job with the money that’s already invested. Rebalancing is a discipline that many professionals use to keep you on target to that allocation that you had set. So an easy example that I share with participants is let’s say my account was 50% in a stock mutual fund and 50% in a bond mutual fund. And then the market went up and up, it’s just fantastic. But I look at my account and now it’s 60/40, it’s not 50/50, which is what I was comfortable with to begin with. So what that does when you set that to automatically rebalance is the computer’s going to look at your account balance, compare it to what it’s supposed to be, and it creates those traits. So you’re buying low and you’re selling high when you’re not even paying attention. And I believe over a period of time that tends to improve people’s portfolio results.

Tim Maurer:
Oh, fascinating. But what if I’m not comfortable right now? What if I’m looking at the headlines, Kristen, and I’m scared to death about what could still come in a subsequent wave of the virus, a subsequent shutdown or any number of responses to the economic stimulus packages that have been out there? Should I just move my investments to a money market fund, if I’m that scared, until the stock market stabilizes?

Kristin Donovan:
So that’s a great question. And that’s a question that we get from all over the country actually. Lots of people ask that question. And it’s a natural question because when we’re afraid, we want to react emotionally. But in reality, what’s in your best interest is to take the emotions out of the equation and actually think about, has anything in your life materially changed, other than what’s going on around you, that changes what your plan is to get to your target income in retirement. And if the answer is no, that you’re still the same person, you still have the same needs, then I would challenge you to take that emotion out of it and not make any rash decisions.

Tim Maurer:
And acknowledging the challenge that it can be to just separate ourselves from our emotions. I even suggest sometimes we should just acknowledge the emotion. Make a decision in advance of how you intend to act when you know you’re going to get to that place of challenge, of fright, that often kind of creeps up in the markets every five or 10 years, at least.

Beacon Hill Private Wealth is an independent, fee-only, fiduciary investment advisor providing evidence-based wealth planning solutions that simplify our clients' financial lives. Founder Tom Geoghegan, CFP®, MBA is also a member of the National Association of Personal Financial Advisors (NAPFA).

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