Gain Insights on Inflation from BDO Wealth Advisory Thought Leaders

November 2022

Consumer prices soared 9.1% from July 1, 2021 to June 30, 2022, the biggest annual increase in prices since 1981.[1] Prices for goods and services including gasoline, groceries, and food and dining have risen at an alarming rate, and inflation has in many ways become a defining theme of 2022.

Plan sponsors may want to evaluate how inflation affects their plan participants, because changes in the price level can affect retirement savings and impact key financial decisions. To help plan sponsors understand the state of inflation today and its potential effects, members of BDO’s ERISA Center of Excellence recently spoke with investment leaders of BDO Wealth Advisors, a wealth advisory firm affiliated with BDO. Mark Biegel, National Leader of BDO Wealth Advisors, and Matt Gotlin, managing director, provide their insights on inflation below.
 

Q&A with Mark Biegel and Matt Gotlin of BDO Wealth Advisors

How serious is inflation today? What is causing the rapid rise in prices?

Matt Gotlin: The consumer price index (CPI), a commonly cited benchmark of inflation that measures the monthly change in prices paid by U.S. consumers, rose 9.1 percent over the 12 months from July 1, 2021, to June 30, 2022. That is a serious increase—historically, the U.S. Federal Reserve (the Fed)’s inflation goal is an annual rate of around 2 percent. Prices have risen due to a number of factors, including global supply chain disruptions, growth in consumer demand during the COVID-19 pandemic, and higher energy costs due to the ongoing war in Ukraine.

According to the U.S. Federal Reserve (the “Fed”), elevated inflation may linger a bit longer. In an August speech, Fed Chairman Jerome Powell said restoring price stability would take more time and cause additional pain for households and businesses.[2] Inflation makes it harder for both businesses and individuals to plan ahead—when it is unclear how much goods and services will cost in the future, it is challenging to confidently do things like invest and set budgets. This uncertainty has caused many people who were approaching retirement to continue working due to the higher costs of living.
 

What can investors do when facing such serious inflation?

Mark Biegel: No matter the environment, we believe investors should avoid the temptation to try to time the market—and plan sponsors may want to help participants avoid falling into that trap. Historical data shows that it is extremely difficult to time ups and downs in the market, and investors who seek to do so often sacrifice significant long-term returns.[3]

We believe that the most important principle for investors to follow in this environment is to have a solid financial plan and stay committed to it. This is especially important during more volatile investment environments, when investors often feel the urge to act and try to adjust the dials on their portfolio to benefit from the prevailing environment. Investors shouldn’t be looking for a cure-all to inflation, but there may be ways to lessen its impact over the near- and long-term.
 

How can plan sponsors help their participants deal with inflation?

Matt Gotlin: For plan sponsors, today’s environment may present an opportunity to revisit their plan’s investment lineup and consider new investments. Plan sponsors may want to review their plan offerings and consider whether they are providing the necessary tools to meet participants’ long-term goals.

As a starting point, plan sponsors may want to consider how different asset classes perform in an inflationary environment. It is common for 401(k) plan lineups to include target date funds (TDF) and a variety of equity and fixed income funds. While stocks tend to offer inflation-hedging characteristics—for example, companies with pricing power may be able to pass price increases onto consumers and limit the effects of inflation on their bottom line—today’s environment highlights the potential opportunity to look beyond stocks and bonds.

Over the long-term, plan sponsors may want to focus more on which asset classes will provide the greatest return for a given level of risk rather than trying to isolate specific factors like inflation.
 

BDO Insight: Think beyond the portfolio

The ripple effects of inflation go much deeper than just an investment lineup. Plan sponsors may want to take a broader view and seek to understand what inflation means for their workforce. Inflation hurts purchasing power, and that can translate into workers staying on the job longer. It can also increase stress, reduce productivity, and lead to other negative effects for an organization.

Rather than just focusing on the investments that will perform best in an inflationary versus deflationary environment, plan sponsors may be able to make the greatest impact by offering additional resources to optimize outcomes for plan participants. These include educational resources and personal wellness tools that can help participants stay calm, make good decisions, and stay on track.

If you would like to discuss what you can do to help you and your plan sponsors better understand the effects inflation has on retirement accounts, your BDO representative is available to help.

 
[1] PBS, “U.S. inflation at 9.1 percent, a record high,” July 13, 2022
[2] U.S. Federal Reserve, “Monetary Policy and Price Stability,” speech by Fed Chair Jerome Powell on August 26, 2022 in Jackson Hole, Wyoming.
[3] CNBC, “Tempted to Time the Market? Look at these charts first,” September 27, 2022.