This August will mark the 10-year anniversary of the passage of the Pension Protection Act, which paved the way for target-date funds as the leading qualified default alternative investment for sponsors and participants in 401(k) plans.

Read: 7 ways fiduciaries should monitor target-date funds

And while the landmark law succeeded in making significant strides to structurally improving the country’s retirement savings system, defined contribution plans are still failing too many retirement savers, according to new research from J.P. Morgan.

“A harsh reality cannot be ignored: The U.S. retirement system is falling short,” write Anne Lester, the firm’s head of retirement solutions, and John Galateria, head of North American institutional investing, in a new paper highlighting the limitations in today’s defined contribution industry.

Read: Small plans lead the way in 401(k) design, efficiency

“Many Americans remain woefully unprepared for a retirement that may last upwards of 30 years,” they wrote.

The two pinpoint what they say is the widespread problem of improper asset allocation among participants, and they call on sponsors, plan advisors, and recordkeepers to comprehensively evaluate re-enrollment as a strategy to address systemic failings.

“Re-enrollment is one action plan sponsors can take that can immediatelyhelp move the needle toward better retirement outcomes for plan participants,” say Lester and Galateria.

According to J.P. Morgan, target-date funds are the “best investment vehicle” as a QDIA for sponsors and participants.

And while the growth in TDF adoption has been widely documented—TDFs accounted for more than 15 percent of DC assets in 2014, up from about 2 percent in 2005—J.P. Morgan’s analysis shows the majority of participants choosing to “go it alone” in allocating assets are either under or over weighted in equity holdings as they approach retirement age, suggesting too many are not utilizing TDF options.

A sampling of 3,000 do-it-your-self 401(k) investors shows at age 60, the majority of investors either hold more or less than 10 percent of the equity allocation in J.P. Morgan’s TDF series. In fact, many of those investors have more than 80 percent of their portfolios allocated to equities, and many allocate less than 20 percent. J.P. Morgan’s SmartRetirement 2020 Fund allocates about 47 percent of assets to equities.

Re-enrollment can direct more participants to TDFs, which would address risk imbalances for participants, says J.P. Morgan.

“Target date funds take much of the emotion out of investing for DC plan participants,” wrote Lester and Galateria.

“Once participants are invested in a TDF, they tend to stay the course and are less inclined than other fund investors to move their assets at inopportune times. As a result, TDF investors overall may have a better investing experience than investors in non-TDFs, who more often buy high and sell low,” they said.

TDF utilization rates catapult when sponsors re-enroll participants, according to J.P. Morgan’s research. When sponsors simply add a TDF to an investment menu, TDFs attract between 1 and 4 percent of plan assets. But when sponsors re-enroll participants and default them into TDFs, TDF assets average between 49 and 97 percent of plan assets.

Notwithstanding the benefits of re-enrollment, only 7 percent of plans have implemented the strategy, which J.P. Morgan says speaks to sponsors’ misconceptions and lack of awareness of re-enrollment as a way to improve retirement outcomes.

In its most recent DC study, the firm found that 54 percent of sponsors were not aware of the fiduciary protections for QDIAs; 28 percent did not re-enroll because they perceived existing plan allocation patterns to be accurate; and 44 percent of sponsors said they feared participant pushback.

“Clearly, the industry can do a much better job of keeping re-enrollment front-and-center in their conversations with plan sponsors,” say Lester and Galateria.

Some plan sponsors also perceive re-enrollment to be cumbersome to execute, but the paper says the requisite technology is widely available through most recordkeepers and service providers.

Instant Insights /

How plan sponsors can help retirement savers succeed by doing 1 key action

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