After months and months of sinking stocks prices, followed by a one-day loss of 700 points -- then an increase of 900 points the next trading day and volatility ever since then -- investing in the stock market hardly seems like a sure thing.
These can be scary times for investors of any type, but for one group, the steady decline in value over the last year-and-a-half particularly hits home: young seniors nearing retirement.
Recent fluctuations aside, the last 15 months have not been kind to retirement-savings accounts, which have lost about $2 trillion -- roughly 20 percent of their value -- over that time span, said Peter R. Orszag, director of the Congressional Budget Office. while testifying before the U.S. House of Representatives Committee on Education and Labor on Oct. 7.
Even defined-benefit plans, often considered a more stable approach, lost 15 percent of their assets over the past year, said Orszag.
Since many workers rely on pension and 401(k) plans as their primary -- and in many cases their only -- source of savings, the downturn could lead to employees waiting longer to retire or be forced to make serious cuts in their own spending, says Robert McAree, senior vice president and retirement practice leader for Sibson Consulting, the HR consulting division of New York-based consultancy The Segal Group.
"For those individuals, it's a much more severe event," says McAree. "It's likely that individuals that are close to retirement might very well re-think those plans."
Nevertheless, McAree suggests that HR tell workers of the option of increasing contributions to their retirement funds to buy stocks while prices are low.
At the same time, the fact that employees may be uncertain about their future increases the risks for businesses.
"[The falling value of retirement accounts] makes it harder for companies to predict who will retire and when," says Alan Glickstein, a senior retirement consultant at Watson Wyatt, a Washington-based HR consultancy. "Employees who mostly rely on 401(k)s are also more likely to worry about their financial security, creating an additional drain on morale and productivity during turbulent times."
Dallas Salisbury, president and CEO of Employee Benefit Research Institute in Washington, says HR needs to educate employees up-front to make sure they know that retirement accounts are linked to stock prices, and that there are no sure things when investing.
"What this underlines is the importance of having your employees educated on what it means to be invested in stocks," says Salisbury. "Make sure they understand that throughout history, there have been periods where stocks have gone down dramatically."
HR should also tell employees that if they can't afford to lose money or see account balances lose value for an extended period of time, then they should put their retirement savings into a safe-asset class instead, he says, which are included in most 401(k) plans.
Glickstein believes that the downturn could spur a debate between offering defined-benefit pension plans and 401(k) plans.
"We are in uncharted territory. The 401(k) plan has been around for less than 30 years, and we've not yet had a generation of workers retire on all or mostly 401(k) assets," he says.
Salisbury, however, says that any debate on the subject will be short-lived, since most companies cannot afford to offer defined-benefit plans, as evidenced by the tens of thousands of such plans that have been terminated or turned over to the Pension Benefit Guaranty Corp. over the years.
"There are many companies for which a defined-benefit plan is not appropriate," says Salisbury, "so it's not an all-or-none, or a one-size-fits-all and it really can't be."