On Wednesday the Fed finally took the first step on the journey to normalizing interest rates by raising the discount rate by 1/4 percent (25 basis points). Thought long overdue by most economists, this interest rate increase, and the higher interest rates that will follow, are likely to have the following effects on your 401k plan and participants:
The Impact Of Higher Interest Rates
Higher interest rates = higher money market fund rates
Most money market funds have been paying investors .01% or less. Mutual fund companies have been subsiding these funds for years. Higher interest rates are not only good for the mutual fund families, but will be welcomed by your plan participants who are risk-averse or close to retirement and have invested heavily in these funds.
Higher U.S. stock market volatility
Future rate increases and when to do them will continue to be debated. Volatile up and down days in the U.S. equity markets are likely as investors alternatively feel good about rate increases, and boost stock prices, or fearful that increases may force the economy into a recession, resulting in market collapses. The U.S. equity funds in your plan may fluctuate significantly.
Falling U.S. stock markets
Many market experts believe that higher interest rates will cause investors who have entered the U.S. equity markets to pick up yield, to move back into fixed income securities. This selling pressure is expected to force U.S. stock markets, and likely the U.S. equity funds in your plan, lower.
One or two interest rate increases have probably already been discounted by investors. As a result, the markets may take a ho-hum attitude to the first few increases. However, the media and investment community are very excited about interest rate increases, so your participants may hear a lot about them. To help your participants put things into perspective, it may make sense for you to share the following thoughts with them:
- Nearly all 401k participants are long-term investors who should not be worried about daily, monthly or even annual fluctuations in the markets.
- Volatile times and periods of significant market stress do not last forever. This too shall pass.
- It is usually best for participants to stick with their savings and investment plan during periods of market change.
- If a participant feels a lot of stress about what is happening to their 401k account, they should get help before making a change. Encourage stressed-out participants to talk with the investment advisor who works with your plan.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.