Workers are getting raises, but are failing to put a percentage of the extra dough towards retirement savings. Further, the amount set aside when savers are just starting out continues to fall and 401(k) leakage via loans and early distributions remain a problem.
It’s all part of the latest installment of the “Ready! Fire! Aim?” research series from J.P. Morgan Asset Management released Friday, an ongoing study to examine how the relationship between target date fund glide paths and participant behavior might shape long-term defined contribution outcomes.
So how are participants doing? Not well, according to the report. Key behavioral include:
- Salary raise frequency seems to have stabilized, but average increases remain below pre-crisis levels. Salary is a crucial behavioral input because income levels influence contribution amounts, as well as the standard of living that needs to be replaced in retirement. The most recent study showed that average raise frequency declined to pre-crisis levels because, J.P. Morgan Asset Management believes, earlier increases were mainly caused by an apparent salary catch-up from the post-crisis slowdown. Average raise size declined somewhat, but still remained slightly above inflation, though this is a relatively low bar given persistently low inflation.
- Average starting contribution rates continue to fall, with subsequent average increases rising much more slowly. The only way participants can be certain to achieve adequate income in retirement is to save enough during their working years. Disappointingly, average starting contributions remain at the lowest point since we began our research, and rise much more slowly than in the earlier studies.
- A large number of participants continue to take sizable account loans. The percentage of participants tapping into retirement accounts pre-retirement has risen to the highest level since J.P. Morgan began tracking behavior, while the average percentage borrowed has modestly fallen, likely due to generally higher account balances after years of rising markets. This indicates that a sizable portion of participant assets are not actually invested in any given year. Many participants also stop making contributions while repaying loans.
- Pre-retirement leakage remains unpredictable. The good news is that there appear to be fewer hardship withdrawals as the economy continues to stabilize, but there are also more loans and pre-retirement withdrawals, which could jeopardize long-term savings. Indeed, the percentage of working participants over age 59½ taking a portion of their account balance and the average percentage withdrawn have both risen to the highest levels in the past 14 years.
- Most participants withdraw their entire account balances once they stop working, usually in a single withdrawal. J.P. Morgan Asset Management continues to see the majority of participants, nearly 70 percent, leaving their plans soon after retirement. However, in this latest study, the team observed that the percentage of participants staying in their plans almost doubled, from 17 percent post-2008 to 32 percent in recent years.
“Our original research found that participant behavior was much more varied and volatile than many target date fund providers had assumed in their asset allocation models. That led us to consider potentially significant ramifications for whether participants were likely to meet their retirement funding needs,” said Dan Oldroyd, Portfolio Manager and Head of Target Date Strategies who oversees $69.7B in assets under management. “Subsequent studies continue to confirm that target date fund designs offering effective diversification and dynamic risk management appear to position the greatest number of participants for retirement income success.”
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.
