What’ll it take to improve 401(k) participant outcomes for employees? Investing powerhouse GMO, founded by legendary perma-crank Jeremy Grantham, took a look at a host of target date fund and 401(k) plan design initiatives that the “DC plan sponsor community” is considering.
They initially concede such initiatives might, in theory, improve the retirement outcomes for their employees, and set out to see if it’s true.
Testing them by measuring the incremental impact each would have had over a specific 40-year time frame (the typical span of a working career) from 1975 to 2015, they systematically analyzed one target date fund variable at a time, including:
- passive vs. active,
- glide path “riskiness,”
- pre-determined vs. dynamic glide paths, and
- deferral rates
The incremental impact of each was measured against a baseline, and they were able to isolate the variables that had the “biggest bang for the buck.”
Based on their results, the two most promising “levers” appear to be adding a dynamic component to the target date fund glide path (rather than relying on predetermined allocations regardless of market conditions and potential Black Swans) and boosting deferral rates.
“But, it actually gets better,” they add. “These two approaches need not be mutually exclusive. A plan sponsor could do both, combining a dynamic approach with efforts to boost deferral rates.”
They conclude that there are “many voices are shouting for the attention of the DC plan sponsor community today, offering ways to enhance target date programs. What we’ve demonstrated here, though, is the importance of cutting through the noise and focusing one’s time, effort, and resources on the initiatives that appear to show the most promise.”
Adding a dynamic component to the target date fund glide path,” combined with an earnest effort to boost deferral rates appears to have the potential to deliver the biggest bang for the buck.”
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.
“Dynamic” means timing??