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.
“In many ways, re-enrollment is the logical next step on a journey that began with the passage of the PPA,” the authors wrote. “After the PPA led to improvements in DC participant asset allocation through the use of the QDIA, re-enrollment allowed the process to happen — with relative speed and with the potential for strong fiduciary protection for plan sponsors.”
PPA established safe harbors for plan sponsors who select prudent defaults and give participants the option to select a different investment. A re-enrollment strategy may help them meet those safe harbors if they select an appropriate QDIA.
Another key benefit of re-enrollment, though, is that it gives plan sponsors another chance to engage with participants on the risks they can control.
“As we see it, the industry has invested far too much time and too many resources trying to educate employees to become investors,” according to the paper, forcing them “to deal with something — the market — that is fundamentally beyond their control.”
Participants are “much better served” when plan sponsors focus their education efforts on savings and asset allocation “and leave it to the professionals to manage market risk.”
JPMorgan, which has its own line of target date funds, found just 7% of plans have used a re-enrollment strategy. A 2015 survey of DC plan sponsors by JPMorgan attributed that to over half of sponsors who weren’t aware of possible fiduciary protection if they defaulted workers into a QDIA, and 44% who said they were worried about participant pushback to such a scheme.
Lester added in the statement that JPMorgan is “optimistic and [has] every confidence that as the adoption of re-enrollment continues to increase, it will go a long way toward strengthening retirement security for millions of American workers.”
— Read Time to Rethink TDF Use in Retirement Plans: Financial Engines on ThinkAdvisor.