Fiduciaries that focus solely on target-date fund performance and fees while ignoring demographics and glide path structure (among other factors) may be missing the mark, J.P. Morgan Asset Management notes in a new report.
To help advisors and plan sponsors obtain relevant data to better understand plan demographics, glide paths and participant needs when choosing a fund, authors Emily Cao, JPMAM’s Head of DC Investment Specialists and Dan Notto, ERISA Strategist, suggest the following four questions be asked:
When do participants generally retire …or start withdrawing their assets?
“In reality, it is more important to focus on when participants start withdrawing assets than on when they retire,” Cao and Notto write. “Based on our most recent Ready! Fire! Aim? research, just 28% of participants remain in the plan three years after retirement. Around 10% of participants withdraw, on average, 55% of assets starting at and after the age of 59.5.”
How diverse are participants in their drawdown of DC account balances in retirement?
“Participants who tend to make larger than average withdrawals to finance essential expenditures in and around the initial retirement years, and those who rely to a large extent on DC plan benefits to support them throughout retirement, may be best served by a TDF glide path that reaches its lowest market risk level at or near retirement,” they note.
On the other hand, Cao and Notto add, if most “participants tend to defer withdrawal of their TDF assets beyond the fund’s target date (perhaps until they are subject to required minimum distributions) and then gradually withdraw balances, a TDF that meets its risk allocation minimum beyond the years surrounding retirement could be more appropriate.”
Do participants generally exhibit “good behavior” in terms of contributions and withdrawals while employed?
Ready! Fire! Aim? research shows participants aren’t saving enough, with contributions reaching, on average, just 7% of their income in the years leading up to retirement.
Additionally, participants who are automatically enrolled and don’t take any further action remain at an even lower average contribution rate of 3%.
The research indicates that participants begin withdrawing funds in the form of loans and hardship withdrawals in their 40s, with 19% borrowing, on average, 20% of their account balances.
What do salary levels and their distribution look like for the participant base?
“Lower salaried employees have less income to replace,” they conclude. “Social Security may provide a significant proportion of that replacement income. At the same time, this population may be reliant on both their DC plan savings and Social Security to cover very basic needs in retirement. They may also have fewer alternative sources of replacement income.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
