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

|

Read: 7 ways fiduciaries should monitor target-datefunds

|

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

|

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

|

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

|

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

|

The two pinpoint what they say is the widespread problem ofimproper asset allocation among participants, and they call onsponsors, plan advisors, and recordkeepers to comprehensivelyevaluate re-enrollment as a strategy to address systemicfailings.

|

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

|

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

|

And while the growth in TDF adoption has been widelydocumented—TDFs accounted for more than 15 percent of DC assets in2014, up from about 2 percent in 2005—J.P. Morgan’s analysis showsthe majority of participants choosing to “go it alone” inallocating assets are either under or over weighted in equityholdings as they approach retirement age, suggesting too many arenot utilizing TDF options.

|

|

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

|

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

|

Target date funds take much of theemotion out of investing for DC plan participants,” wrote Lesterand Galateria.

|

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

|

TDF utilization rates catapult when sponsors re-enrollparticipants, according to J.P. Morgan’s research. When sponsorssimply add a TDF to an investment menu, TDFs attract between 1 and4 percent of plan assets. But when sponsors re-enroll participantsand default them into TDFs, TDF assets average between 49 and 97percent of plan assets.

|

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

|

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

|

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

|

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

|

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.