Ten years after passage of the Pension Protection Act, JPMorgan Asset Management argues that many defined contribution plan participants are no better off than before the act. In a paper released April 26, JPMorgan made the case for plan sponsors to implement re-enrollment initiatives to address improperly allocated accounts.
“It’s important not to underestimate the damage that can be caused by inappropriate asset allocation by DC plan participants,” Anne Lester, head of retirement solutions for J.P. Morgan Asset Management, said in a statement. “Re-enrollment is one action plan sponsors can take that can quickly help move the needle toward better retirement outcomes for plan participants.”
That change is largely effected by reallocating participants into target-date funds.
Automatic enrollment predates the PPA, according to Lester and John Galateria, co-authors of the paper. Prior to the act’s passage, default investments were typically stable value or money market funds.
“As a result, many participants ended up in these funds — and stayed there for years, leaving them with inappropriate, and sometimes extremely inappropriate, asset allocation for their age and risk profile,” the authors wrote.
JPMorgan encourages the use of target-date funds as a 401(k)’s qualified default because they take “much of the emotion out of investing for DC plan participants,” in addition to their derisking glide path.
“Once participants are invested in a TDF, they tend to stay the course and are less inclined than other fund investors to move their assets at inopportune times,” the authors wrote, noting a Morningstar report that found over the 10 years between 2004 and 2014, asset-weighted returns for TDF investors were 1.1 percentage points higher than the fund’s total return.
In 2005, less than 3% of retirement plan assets were allocated to target-date funds. An analysis by EBRI/ICI in April found 18% of assets were allocated to TDFs for almost half of participants.