Advisers needed as Congress paves the way for selling low

As if financial planning in a COVID-19 world wasn’t difficult enough, Congress has decided to grease the skids for investment declines by opening the doors to withdrawals from qualified retirement savings plans.

This is not to suggest that the global pandemic doesn’t represent a serious threat to the health and finances of way too many people. But it's already clear how easy it is for individual investors in general to downplay the need for retirement savings.

While one can appreciate lawmakers' efforts to soften the blow from the slowing economy and the spike in unemployment, and provide as much assistance as possible, removing the gates on retirement plan assets is one area where financial advisers should be standing by to help clients assess how the immediate need compares to the potential longer-term consequences.

According to Fidelity Investments, last year at this time the average 401(k) plan balance was $106,000, up just $2,000 from a year earlier.

Nobody in their right mind really wants to know what that average looks like today. But with the S&P 500 Index down about 19% from the start of the year – after having been down as much as 30% – you can bet that anyone taking advantage of Congress' easing of the rules around withdrawals from retirement plans will be selling low.

These are difficult and uncertain times, and the unprecedented $2.2 trillion stimulus package is testimony to that. But it is hard to imagine that removing the 10% penalty for early withdrawals from retirement plans won’t encourage some bad retirement saving behavior.

According to a report out last week from Empower Retirement, which surveyed 2,000 Americans during the third week of March, 27% of respondents are planning to sell or cash out their retirement accounts. And that was before Congress eased the restrictions.

The latest data from the Investment Company Institute also indicate a move toward the exits by investors.

During the first two months of the year, just before the coronavirus started gaining real speed in the United States, there were nearly $72 billion of net outflows from domestic equity mutual funds. That compares to $7 billion worth of net outflows during the same two months a year ago, when the stock market was recovering from a 20% drop at the end of 2018.

The ICI's most recent data show $149 billion worth of net outflows from mutual funds during the seven-day period ending March 25.

That compares to net outflows of $135 billion the previous week, and net outflows of $27.8 billion two weeks ago.

For the seven-day period through March 25, ICI reports that money market fund assets topped $4.2 trillion, up from $3.9 trillion a week earlier, and $3.8 trillion two weeks earlier.

Rebalancing is one thing, but heading for the hills, assuming there are alternatives, will make the pain of this awful pandemic even worse when it's over.