Participants in 401(k) plans have seen their salaries rise since 2007, but they are contributing less to their retirement plans over time, according to new research by JPMorgan. And target date funds continue to have too much volatility embedded in their portfolio design.
"Ready! Fire! Aim?" examines the effectiveness of various target date strategies to see if they are helping 401(k) participants save enough for retirement. The research was designed to help plan sponsors think through portfolio and glide path design to make more effective decisions around the type of strategy that best meets a particular plan's needs and goals.
What it found is that contribution rates for auto-enrolled participants are even lower than the average starting contribution rates of plan participants. It also found that a large number of participants continue to take sizable account loans, and pre-retirement hardship withdrawals and withdrawals by younger participants are on the rise. Post-retirement, most participants continue to withdraw their entire account balances within three years after they stop working.
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Because of this less than optimal behavior and heightened investment volatility, there has been a wider dispersion of participant outcome projections. A greater number of participants face increased uncertainty in securing adequate levels of retirement replacement income, the report found.
It is little surprise that lower contribution rates and higher withdrawals lead to poorer results across the board, but these patterns can be even more devastating for participants who also experience difficult investment climates. This is particularly concerning given general market expectations for elevated equity risk and generally more muted returns for the foreseeable future, according to the report.
Fortunately, plan sponsors can employ a number of proactive strategies to help better position participants for retirement success, including higher default contribution rates and higher automatic contribution escalation rate increases.
The research shows that it remains critical for plan sponsors to understand how fundamental differences in target date fund design may shape participant outcomes, both from market volatility and cash volatility perspectives. JPMorgan found that target date strategies that pursue competitive long-term returns with less volatility and closely controlled levels of risk — through broader asset class diversification and relatively rapid reduction in equity exposure in the years leading up to retirement — continue to increase the potential number of participants that will reach their retirement income goals.
Proactive plan design can be equally important in getting as many participants as possible safely over the retirement finish line. Even the most carefully constructed target date fund design will fail to deliver if participants do not invest in it.
Evidence continues to mount that, when left to their own devices, many participants exhibit suboptimal saving and withdrawal behaviors that may put them at risk of falling short of their retirement savings goals. This underscores the importance of proactive plan sponsor strategies such as automatic enrollment, automatic contribution escalation and plan re-enrollment.
These programs can potentially get more participants into the plan, get them to save more realistic amounts and place them in professionally managed strategies to help maximize their retirement investment potential. Higher default deferral rates, higher contribution rate increases and actively moving more participants into plan QDIAs can all go a long way toward combating suboptimal participant investment and saving behaviors, the report concluded.
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