By Cal Burgess

https://www.dropbox.com/home?preview=WISE-ThinkTwice-401k-FINAL.pdf

Today, employees that are transitioning to working remotely or changing employers have a real need to protect their 401k, 403b, or other employer sponsored plan (ESP) from an over-leveraged stock market that seems to operate outside of pre pandemic standards. When an employee parts ways from their previous employer, the employer no longer contributes monthly to the ESP. This changes the employee’s direction and motive in managing the qualified plan. Given that the accumulated value is not going to be matched moving forward, many choose to roll over their ESP into a new qualified plan, most of which ends up as an Individual Retirement Account (IRA)

An ESP is a deferred compensation plan, usually funded monthly or bi-weekly, set up to help you prepare for your retirement needs. These plans were designed to replace the traditional pension plan that became less popular in the mid- to late-1980s. Corporations can no longer afford to fund the income stream that pensions would traditionally provide during retirement, and the ESP became a new alternative that employees continue to participate in. These qualified plans, mainly consisting of a 401k or 403b, are managed by the employer while the employee bears all the risk. Most ESPs are dependent upon the performance of the stock market, and over the last 10 years and with the stock market sitting at the highest level in US history, the majority of these plans have done extremely well. However, when an employee parts ways with their employer, they must continue to manage this as an individual, meaning they will need figure out what to do with the money and how to invest it.

When an employee departs from an employer, they have many options for continuing their retirement goals. Investment options can range from high-risk to conservative growth, depending on the risk tolerance of the individual. Considering that the vast majority will use this money to supplement their retirement income, long-term growth is usually the preferred direction. However, within a global pandemic and a top-heavy stock market, the focus of many financial planners gravitates towards short-term planning, in an attempt to shield their investors’ nest eggs from significant losses, if and when the market does fall. Considering the current financial climate, experienced advisors tend to err on the side of caution, meaning short-term planning can disrupt a financial timeline depending on how long the threat of volatility lingers in a recovering economy. For the
investors that want to pursue their long-term interests by focusing on maintaining their established timelines, specialized index investments is likely the best alternative.

Specialized index investments focus on long-term planning and can navigate market growth with principle protection, meaning that, through secured index funds, investors can enjoy moderate market growth tied to an array of financial indices. Typically, an investor will give up a portion of the market upside in exchange for total downside protection, ensuring moderate growth in almost all market environments. These strategies have continued to evolve over the last 20 years and can bring tremendous value for investors through attractive returns. Just like every other financial vehicle, some of these specialized index investments fare better than others, so you’ll want to speak with a financial professional to see which option is best for your needs.

When an investor converts their ESP to an IRA, they can take the next step in pursuing moderate returns exempt from volatility. Rather than focusing on the timing of the market, this strategy focuses on consistent and moderate returns to achieve their goals. The truth is, many investors are looking to shield themselves from the ever-present noise and distraction of a polarized political and financial world. Fear from COVID-19 is amplifying and distorting reality to serve selfish motives, which can cause distrust and unnecessary actions. Instead, these investors want to focus on their own lives and be assured that their long-term goals are being addressed outside of all the chaos. Their mindset is that polarized views only distort goals, so they prefer to look to options that separate their investments from that noise.