MANY PARTICIPANTS WOULD RATHER LEAVE RETIREMENT INVESTING TO PROFESSIONALS
As seen in Part 1 of our series, 2018 Defined Contribution (DC) Plan Participant Survey Findings, less than 40% of participants are highly confident in their ability to make key investment decisions and many are not fully engaged in monitoring their 401(k) accounts.1 In fact, the majority want the help of an expert in managing retirement assets, but most still stop short of wanting employers to choose their investments for them (EXHIBIT 1).
We saw in Part 2 that strategies to improve savings rates need to provide the right balance between employer encouragement and participant choice. A similar statement can be made about this article’s focus—strategies designed to streamline investment decision-making (such as target date funds [TDFs] and re-enrollment). Streamlining need not mean taking ultimate control of investment decision-making out of participants’ hands.
TDFs have gained popularity among participants and are the qualified default investment alternative (QDIA) of choice among plan sponsors. Using QDIAs such as TDFs in conjunction with automatic enrollment and re-enrollment strategies has the potential to motivate saving and simplify investing—for both new and existing participants.
Yet re-enrollment has had a slower uptake among plan sponsors, despite participants’ generally favorable views and high levels of satisfaction with these strategies. We look at participants’ perspectives alongside those of plan sponsors and examine possible misperceptions that may be tempering the adoption of these strategies.
Many want the help of an expert in managing their 401(k) investments
EXHIBIT 1: TO WHAT EXTENT DO YOU AGREE OR DISAGREE WITH THE FOLLOWING STATEMENTS? (% RESPONDING “SOMEWHAT AGREE” OR “STRONGLY AGREE”)
NNote: 2016 Total n=1,001; 2018 Total n=1,295.
Source: J.P. Morgan Plan Participant Research 2016, 2018.
TARGET DATE FUNDS
Target date funds are designed to streamline investing for participants without the time, talent or inclination to manage their own investments. What’s more, the professionally managed glide path strategies underlying TDFs guide the allocation of assets over time, adjusting toward a more conservative asset mix as the participant approaches his or her retirement date. (Note that the principal value of the fund(s) is not guaranteed at any time, including at the target date).
TDFs are highly valued by participants: 88% find them appealing and, among those who say their employer offers TDFs, 71% are invested in them. These strategies are perhaps best suited for those lacking confidence in their investing knowledge: Among “do it for me” investors, 93% find them appealing and, when they are available in the plan, 81% invest in them. But even among “do it yourself” investors, 81% find TDFs appealing and, if they are offered in the plan, 54% invest in them (EXHIBIT 2).2
Even “do it yourself” investors find TDFs appealing, and over half invest in them when they are offered in the planEXHIBIT 2: ATTITUDES TOWARD AND USAGE OF TARGET DATE FUNDS
Note: 2018 Total n=1295; “do it for me” investors n=773; “do it yourself” investors n= 522.
*Of those invested in TDFs if offered in plan, total n=635; “do it for me” investors n=397; “do it yourself” investors n=238.
Source: J.P. Morgan Plan Participant Research 2018.
The ability to use QDIAs, such as target date funds, in conjunction with automatic enrollment can help plan sponsors proactively place new employees on a strong saving and investing path. But what about the generally much larger number of existing participants, some with sizable account balances, who may also lack confidence in their investing know-how, suffer from inertia … and fail to monitor and adjust the allocation of their retirement assets on a regular basis?
Some employers believe that all participants in their company’s 401(k) plan should review and reaffirm their investment selections periodically to ensure they are still appropriate. In these cases, in a process known as re-enrollment, employers notify participants that their existing account balances and future contributions will be defaulted into the plan’s QDIA (for example, into a TDF) unless the participant takes action by opting out and selecting a different investment option during a specified time period. Before conducting a reenrollment, a plan sponsor must engage in a prudent process for determining whether a re-enrollment is appropriate for the plan and its participants.
Our research indicates that re-enrollment into a QDIA can be an effective process for getting participants to review and potentially improve their asset allocation, as well as simplifying the process for keeping that allocation strategically aligned with their retirement goals. In fact, despite the large majority of participants who find target date funds somewhat or very appealing, when TDFs are simply added to investment lineups, only about 1% to 4% of plan assets end up in these strategies. But when plan sponsors conduct a re-enrollment, the TDF share of plan assets is a much larger 49% to 97%.3 This is another illustration of inertia at work. Simply given the option to invest in TDFs, most participants do nothing, but when defaulted into these strategies, few opt out.
Conducting a re-enrollment is a concrete action that plan sponsors can take, aimed at improving the retirement outcomes of a large share of plan participants. Yet only 14% of plan sponsors (and 19% of large plans) have taken this step (or said they plan to do so in the next 18 months)—well below the implementation rates for automatic enrollment (64%) and automatic contribution escalation (50%).4 We believe this modest uptake may be attributable in part to a few misperceptions on the part of plan sponsors, for example:
Fear of employee pushback was the most frequently cited reason for not conducting a re-enrollment among the 87% of plan sponsors who have not yet done so,5 yet:
86% of participants (90% of “do it for me” investors and 79% of “do it yourselfers”) are in favor of or at least neutral toward these strategies
83% of participants who went through a re-enrollment with a TDF as the QDIA allowed their assets to be moved
- 99% of those who allowed their assets to be moved are satisfied
Comfort with their plan’s overall asset allocation was the second most frequent reason: 56% of plan sponsors are highly (very or extremely) confident that participants are appropriately allocated,6 but:
Only 34% of participants are highly confident in selecting plan investment options, and …
Only 39% are highly confident about how to adjust the way plan assets are invested as they approach retirement7
- Nearly three-quarters (73%) of self-allocating participants fall outside the range of equity exposure generally considered appropriate for their age8
Other plan sponsors said they had not conducted a re-enrollment because they were unaware of or didn’t know enough about it, they think it would involve too much work or they are concerned about fiduciary risks. Plan sponsors and their advisors/consultants should keep in mind that:
Conducting a re-enrollment can be more complex than incorporating automatic design features—but re-enrollment has the potential to more quickly impact the asset allocation of a larger percentage of participants, with a larger percentage of plan assets in their accounts.
- In fact, ERISA safe harbor protection may be available for assets re-enrolled into a QDIA.
IMPLICATIONS FOR PLAN SPONSORS
Re-enrollment and automatic plan features, implemented with QDIAs such as target date funds, have the potential to positively impact retirement saving and investing for new and existing participants alike. Of course, every plan is different and the appropriate combination of strategies will vary. In considering approaches for strengthening their defined contribution plans, it is important for plan sponsors to understand their participants’ level of saving and investing know-how, and to be aware of their attitudes and behaviors. Being informed about the latest strategies and the fiduciary protections available to support their adoption is also critical. Working closely with their regulators, providers and advisors/ consultants, plan sponsors can continue to strengthen their plans and help more participants turn their retirement resolutions into reality.