Managing a capital accumulation plan through COVID-19
BY Yaelle Gang | March 18, 2020
In this time of global pandemic, the coronavirus is shaking up everything, with high market volatility and changing work arrangements. Everyone is worried — not only for their immediate futures, but also for the long term.
“It’s pretty hard to watch the market go through the volatility that we’ve seen over the last couple weeks,” says Janice Holman, principal at Eckler Ltd. “People are getting quite nervous.”
In response, capital accumulation plan sponsors are reaching out to communicate with their members and record keepers are also posting message on their websites, she says.
Holman advises pension plans to encourage members to ensure they’re avoiding mis-information, focusing on the long term and staying the course.
Further, with the markets being so volatile, people who sell out may miss an upswing if it looks like Canada is doing a good job flattening the curve, she says, noting “markets are moving so fast right now that you can’t time anything.”
As well, the majority of money in Canadian CAPs is invested in target-date funds. So plan sponsors may have to tell members close to retirement that their money is in a balanced portfolio and they have a portion of it in bonds or other asset classes that aren’t falling the same way as the stock market, Holman says. “And so, they probably have not endured the losses that they might be expecting if they were just watching the news.”
At close of business on Mar. 16, the Canadian bond market was up just under three per cent year-to-date. “While the equity markets look really bad and they’re down about thirty per cent so far this year, the bond market has had positive returns with the drops in interest rates,” she says. “So that is providing some protection in those nearer dated target-date funds.”
Another point for plan sponsors to reiterate to members is that companies are still contributing to plans and buying at depressed prices, which helps bring down the average cost in their portfolio, Holman adds. “Companies are committed to doing that. It helps to spread out the losses a bit when you’re averaging down on your purchase prices.”
On top of communications, there are other policies at work. For example, record keepers already have short-term trading policies where they’ll start to penalize members that are in and out of funds multiple times in a short window, she says. “That should hopefully limit people that are either trying to game the markets or are in their accounts panic buying and selling.”
While Holman hasn’t seen any plan sponsors implement additional policies yet, one action that may be on the way — depending how the current situation plays out and whether companies lay off employees — is a potential change to withdrawal restrictions for registered retirement savings plans and tax-free savings accounts so the savings can be accessed as a source of emergency funding.
As well, even if a particular employer isn’t laying off employees, their plan members may have a spouse who’s laid off. “I could see that plan sponsors might review those provisions in the coming weeks if the economic fallout from [COVID-19] continues to worsen.”