Inflation nudges retirement plan participants to adopt healthy habits

Record inflation numbers and a looming recession are worrisome for retirement plan participants, many of whom have seen their balances decline below 2021 levels. While there are no perfect answers for navigating extremely volatile markets, there are behaviors, such as rebalancing, seeking independent advice and diversifying plan assets, that seem more urgent today than 18 months ago, when the market seemed to move in only one direction: up. These behaviors help participants act more like institutional investors and put them in a good position to weather current and future volatility.


While it’s always wise for plan participants to review assets on an annual basis to ensure that their fund elections are aligned with their retirement goals and risk tolerance, the need increases during periods of high volatility. Institutional investors rebalance automatically and often, increasing exposure to underperforming asset classes, which allows them to sell high and buy low. The average plan investor does not.

In today’s market — with so much uncertainty and confusion — advisers and plan providers should encourage participants to rebalance their portfolios quarterly or at least semiannually, with an eye to preserving their overall asset allocation.

For participants who want help making sure their investments stay on track, many plans have auto-rebalancing features. Participants simply enter their desired asset allocation and how frequently they want to auto-rebalance. When the market moves, the plan automatically keeps their asset allocation and risk preferences in place by selling shares in one holding and purchasing shares in another.


During periods of market volatility, participants often have more questions than answers. They need someone to talk to, to make them feel comfortable and ensure that their fund elections match their short- and long-term goals.

That’s because investing is as much about psychology as it is about actual numbers. During a bull market, it’s emotionally easy to get into the market and invest. When there’s turbulence or a downturn of 20% or more, participants generally need more encouragement to make contributions and stay the course. Over the past few months, many plans have been experiencing heavy employee call volume on support hotlines. For some, a phone call is enough, but others need someone to hold their hand, run scenarios and provide more personal advice.

According to a recent Morgan Stanley survey, 87% of plan sponsors report that offering access to a plan adviser within a workplace retirement plan delivers better retirement outcomes for participants. Currently, roughly 15% of workplaces offer independent advice as a voluntary benefit for employees. Over the next few years, NFP believes the percentage will more than triple, climbing to at least 50% due to growing economic complexities — such as inflation, recession, regulation, market volatility and demographics.

In the past, do-it-yourself plan participants could follow rules of thumb such as a 60/40 allocation and relax for a quarter or two. Today, investors need more personalized guidance (geared to their life-stage, goals and risk tolerance) and someone to help them stay the course when balances dip below comfortable levels.


When markets decline 20% or more, plan participants become more interested in guaranteed products, which pay a fixed rate of income throughout retirement. Fortunately, more sponsors are incorporating guaranteed options into qualified plans. In fact, over the next six to 18 months, NFP expects retirement income options to be much more available in plans.

Most advisers recommend that individuals have some amount of guaranteed income (15% to 40%) in their retirement plan. With 60% of U.S. retirement assets invested in defined-contribution plans, it’s natural that these plans include a guaranteed option. Look for an uptick in both the supply and demand of in-plan retirement income products, especially if markets remain volatile.

There are even more out-of-plan retirement income options, into which participants can roll their retirement plan assets. Investors should consider using guaranteed income products to cover basic living expenses in retirement, such as food, shelter, utilities, transportation, health care and insurance. There is a wide and growing range of stand-alone retirement income products, allowing investors to pick the right option for them.


While the current economy is causing uncertainty and jitters, it’s also nudging participants to adopt healthy financial habits and act more like institutional investors. To navigate the market successfully, participants need to rebalance often, seek out one-on-one advice and consider buying some retirement income protection. While extreme turbulence is unlikely to last forever, the habits employees form today can last a lifetime. That’s welcome news for advisers and plans, as well as for participants.

Nick Della Vedova is president and Jeff Elvander is chief investment officer of NFP Retirement.