Retirement Plans and Potential Election Impacts

The period leading up to a US election, and this 2024 election year is no exception, often brings increased market volatility due to uncertainty surrounding potential policy changes. Investors may react to campaign news and political developments, which can lead to short-term fluctuations in both the stock and bond markets. To further add to the uncertainty, we have seen the first of potentially a series of Federal Reserve fed funds interest rate cuts as inflation declines and nears closer to the Fed’s target of 2%. 

These rapidly changing political, market, and economic dynamics may be overwhelming for retirement plan participants who may be unsure as to the best course forward. As a result, they may pause retirement-related savings decisions or reallocate what may be a growth-focused portfolio to a more conservative allocation. In this article we will take a quick look at the various dynamics in play and offer suggestions for helping retirement plan participants stay the course.

Political Impacts

When it comes to retirement plans, different political parties may have varying approaches:

• Democrats may advocate for policies that expand access to retirement plans, including automatic enrollment features or the expansion of tax credits. 
• Republicans may also focus on expanding tax advantages related to retirement savings, such as raising contribution limits for retirement accounts and providing additional tax breaks. 

However, recent bipartisan efforts, such as the Setting Every Community Up for Retirement Enhancement (SECURE) Act and SECURE 2.0 Act, show us that both parties have a shared interest in improving retirement security. Regardless of the US election's outcome, retirement readiness remains an important issue for both political parties.

Fed Policy Changes

Recently, the Fed began its reversal of its historic two-year rate hike trajectory with its first fed funds rate cut of ½% as it seeks to support continued economic growth, a healthy employment rate, and declining inflation. Lower interest rates can stimulate economic growth, potentially boosting stock market returns, which can be beneficial for retirement accounts with significant stock exposure. However, rate cuts also lead to lower yields on bonds for participants nearing retirement who may have a higher fixed income allocation and a more conservative portfolio to meet potential income needs as they transition to retirement. 

Helping Participants Stay the Course

To navigate these various dynamics and some of the uncertainties they bring, now is a good time to remind retirement plan participants to consider the following five actions:

1. Keep a long-term perspective - Focus on long-term financial goals rather than reacting to short-term market movements or election outcomes.
2. Understand your goals and risk tolerance - So you can invest in a way that will help you meet your long-term goals and sleep well at night. 
3. Diversify your portfolio - To manage risk and help reduce the impact of market fluctuations. 
4. Remember, it’s time in the market, not market timing, that is the key - Market timing may lead to suboptimal returns compared to a consistent, long-term investment approach.
5. Work with a financial advisor - No need to go it alone if help is needed with any of the above. An advisor is always happy to take a look at a retirement plan participant’s whole financial picture and provide guidance on retirement and other financial goals. 

As always, your Sentinel representative is available to help you with any retirement plan participant communication needs.