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Communicate to Manage Expectations


The New York Times on July 9, 2001 published an article titled "401(k) Accounts Are Losing Money for the First Time." Unrealistic expectations have led people to believe they should seek 20-30% investment returns every year. A 12% return was just unacceptable. But last year we saw a different story. Even after adding thousands of dollars to their accounts, 401(k) participants lost more than 10% of their 1999 value. This year, while not as bad as last year, seems to be continuing the trend. Many employees are confused and discouraged. They're asking more questions and trying to decide how to cope with these events. Some employees have reduced or even discontinued contributions to their plan in an effort to try and ride out the storm.

During uncertain times like these it is important to talk to employees and encourage them with good practical information. A market downturn, over the long haul, usually produces opportunities to buy more shares at a reduced price. The median duration of a bear market over the last 50 years has been about twelve months and the median drop has been over 22%. Therefore, employees need to realize that current market fluctuations are a normal part of the investment cycle.

I recently received an email from a company called Larkspur. It was a script to be used to convince a client to worry less about short-term market volatility. It went like this:

Advisor: Mr. or Ms. Client, How far is your house from my office?

Client: I think it's about 2 miles. Why do you ask?

Advisor: My assistant and I have a bet. She says its 1.9 miles and I say it's 2.1. On your way home, would you mind checking the distance for me and letting me know?

Client: Sure, no problem.

Adviser: (Hands that client a 12 inch ruler) Here's something to help you measure the distance.

Client: (Looks at adviser and assistant like they're crazy) You want me to measure the distance between your office and my house with a 12-inch ruler???

Advisor: Of course not. I did it to illustrate a point. You'd never measure a distance of 2 miles with a 12-inch ruler. By the same token, you should never measure your progress toward achieving your long-term financial goals by looking at yesterday's close in the paper.


However you say it - it's important to communicate to your employees. They don't expect you to control the market or to be able to predict it, but they do expect you watch it and provide them with enough information to help them make good decisions.

Contact BusinessPlans to discuss how we can help you to communicate with your employees.