Episode 17: The Case for Auto Enrollment

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Welcome to Revamping Retirement, a podcast brought to you by Comac Retirement Group, where we tackle the retirement plan related issues plaguing fiduciaries and plan sponsors. Our host, Mike Webb, has more than 25 years of experience in the retirement plan industry and is a nationally recognized subject matter expert. We hope you enjoy Revamping Retirement.

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Thanks, Kara—Kara McCauley, our amazing producer, and thanks once again so much for joining us for what this is now. Episode 14 of Revamping Retirement. Mike Webb with you about the next 10 minutes or so. Let’s hopefully inform and entertain you about something related to retirement because that’s our job here at Revamping Retirement—that’s what we do. This month’s topic.

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probably not a surprise—coronavirus is on everyone’s minds. I’m sure a lot of you are in difficult circumstances with this going on. Stay safe, follow all the directions from authorities. I’ve become, not that I wasn’t a hand washing maniac before, but I’ve become especially a hand washing maniac now. As you can see, we’re having this monthly podcast, so Mac Retirement, it’s business as usual. Maybe a little less business face to face, really full steam ahead and we’re going to continue to provide you with hopefully outstanding content in the form of our newsletters.

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our Twitter, our LinkedIn, our blog, Top of Mind blog, and our podcast just as we always have in the coming months. I can tell you, you know, I have a lot of retirement plan money and I’m not thrilled by this new bear market any more than you are. As I’m looking right now at the ticker, the Dow Jones, as I’m recording this, and it probably dramatically changed me now because it’s been so volatile, is down about 26 % from its peak on February 12th. So that’s 26 % drop in just…

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Just over a month as I record this. So that’s pretty amazing. Certainly one of the worst months in the last 50 years or so. To put that perspective, the S &P, I know it’s different from the Dow average, I think only went down 21 % in the month that included the infamous Black Monday crash when we went down the highest percentage all time. 26 % is nothing to sneeze at. So before we get started into our topic, which is gonna be addressing all the questions people have had.

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about what they should do in light of the new bear market based on coronavirus. I want to give you a little question about the last bear market. Now put on your recollection cap and flash back to 2007-2009. Yeah, wasn’t that long ago. It was our last bear market. how much during the bear market from peak to trough, from the top to the bottom, did the Dow Jones Industrial Average drop?

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You may be a little surprised by the answer and I’ll give you that at the end of the podcast. But just want to have a few words of reassurance here as we go forward in terms of the market. No doubt this kind of market is very volatile and this is a big deal. I’m not going to understate the fact that this has been a major market move. Back in episode one, for those of you loyal listeners, I did a podcast called The Stock Market Doesn’t Matter. And this is a little test of it now because we’ve got a market that’s going down and down. But…

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What I said in episode one still applies today and let me give you the reason. For most people, the driver of their asset growth and their retirement plan, and we care about retirement—the biggest balance wins., not how you got there. So the driver of that balance in the early years and even in the middle years is going to be contributions.

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I’ll give you an earlier example of that like I did in episode one. Only we’re going to make it a little worse time. we’re really going to test it. Last time was pretty bad. We gave an example where the market dropped 30 % two years ago.

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which hasn’t happened since 1930, 1931. But let’s juice it up a little bit since people have been very worried about this. Let’s juice that up to 50 % negative returns—which would obviously be unprecedented. But let’s just say we have just a terrible scenario where we lost 50 % in first two years. Let’s make it even more interesting and say you’re a new hire and you got hired on February 12th, 2020. Lucky you, the peak of the market.

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and you decide to put a thousand dollars in the year and your employer got that first bit of it in that very first day. We’re even going to make it a little simpler. We’ll say your employer got all of it in that very first day. So kind of make it a worse worst case scenario. So they put the thousand dollars in now. In reality we know that’s not going to happen. Not only money is going to go into peak of the market. we do this thing with 401(k), 403(b), and 457(b) plan deferrals called dollar cost averaging where you deposit things on a monthly or bi-weekly or even weekly basis and they’re all going to buy stocks at different prices. So you’re not going to have that scenario where

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you put in the thousand and wow it lost you know it lost 26.8 percent in a month if you were all in the Dow Jones’s gesture average. Your downs are going to be smoothed and your ups are going to be smooth so you’ll earn a little bit less going up and a little bit more going down because you’ll purchase units of mutual funds at different times and at different prices so that you’re going to have that timing diversification smoothing of your returns. So it’s not going to be as drastic even in real life as this but I want to do it just to do the simple math. Okay so we put in a thousand on February 12th

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Let’s say the market lost 50% by the end of 2020. Thank you for playing. We have some nice party gifts for you. Time to stop your 401k now. No, of course not. This is what happens. Think about the math. I started at zero, I put in thousand, I lost 50 % and I have 500. I still have $500 more than when I started. And remember we said the object of the retirement game is biggest balance wins. So we don’t care about, oh, I put in a thousand, I lost 50. We only care about the results.

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I started zero, I went to $500. So I got an infinite return by year one, infinite asset growth. We don’t care where it came from. It’s again, who has the biggest balance? So year two, same thing. Put in a thousand was unlucky to put it in the very beginning of the year. So now I have 1500 at beginning of the year, drops another 50%. Goes down to 1500, is gonna go down to $750. Even though I lost 50%, two years in a row.

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In my second year now, I went from 500 to 750 or a 50% gain on my retirement account balance. See what I’m getting at here, folks? The stock market doesn’t matter for that person. Yeah, you may say, well, they could have had blah, blah. No, it’s going to keep going that way until their contributions become a very small component of their account. And you know what happens? That only happens when they have a much larger balance. But let’s focus on a small example where

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That’s gonna happen in year one and year two and year three and year four. Your contributions are gonna be offsetting any losses. And if you get any growth, never mind, after those two 50 % losses, chances are we’re gonna have a growth here. And you know what that means? We’ve a lot of our shares at a very low cost. So a lot of those shares are gonna skyrocket and you’re gonna recover a lot of that money. Now, the last bear market we had, it recovered in its entirety in four years. But some people didn’t even have to wait that long for their portfolios to recover because again,

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their dollar cost averaging their buying shares at different times. So even in that big bear market of 2007 to 2009, it recovered in four years. But it doesn’t matter. For someone early in their working career, the message is going to be save as much as you can. Imagine that person maxed out. They’re still going to have a lot of money in their account. The investment return is a tiny component of it. And that goes on through your mid career. When does it matter? It matters when you have a million bucks. matters when you have a lot of money. But the good news is

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If I have a million bucks, you know, and I have a 50 % loss, well, you know, I have 500,000 bucks, which is, you know, big loss for that person, but you’re still going to be in probably the top decile of all retirement plan balances. So you can afford it a little bit more. Again, if you don’t change your investments of other bear markets or indication, you’re going to get that money back. So the only real problem is people who are at retirement and you know all that money right away. But most people take out their money over time.

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And there are ways to even manage that $500,000 loss, believe it or not, in proper decumulation strategies so that you’re taking out small amounts of money over time and can, again, mitigate the factor of a market downturn. So the overlying message here is going to be all those people saying, should I stop saving? No. Should I increase my saving? If you can, bear market or bull market, if you can afford to save more, save more. Save more for retirement. Save more in emergency funds. Save more toward everything. The younger you save,

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the better because that’s the magic of compounding. So that is the message I want to send everyone. It’s an optimistic message, but I think it’s a realistic message as well. So for many of you out there, don’t panic about the stock market. Answer to our trivia question. Last bear market, how much did the market go down? The Dow-Judges-Ussher average went down 54%. So hopefully that won’t happen. If it does, I’ll still be here along with our producer, Karen McCauley and our entire production team.

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I’m Mike Webb, and this has been Revamping Retirement.

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The content in this podcast is for institutional investors and plan sponsors. The information is intended to be educational and is not tailored to the investment needs of any specific investor. All examples of investor gains and losses are hypothetical and intended to illustrate the importance of early saving and consistent retirement contributions over time. Investment decisions should be based on an individual’s own goals, time horizon, and risk tolerance. Nothing in this content should be considered as legal or tax advice, and listeners are encouraged to consult their own lawyer.

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accountant or other advisor before making any financial decision. Thank you for listening to Revamping Retirement.