Participants in defined contribution plans aren’t handling those plans well enough to see them through retirement.
That’s according to the latest installment of the Ready! Fire! Aim? research series from J.P. Morgan Asset Management, which finds that, continuing a decade-long trend, participants are failing to save enough, taking loans from their plans and withdrawing large amounts from the plan shortly after retiring.
There’s good news and bad news in the report, with auto-enrollment succeeding at expanding participant engagement being good news. It’s particularly effective among younger participants, with more than half of 25-year-olds now investing in a plan having been automatically enrolled.
But the bad news about auto-enrollment is that, if not coupled with auto-escalation, it fails to get passive participants to up their ante. Says the report, “A sizable segment of participants are starting average contributions at a minimum 3.3% rate and failing to take any action other than what the plan sponsor makes on their behalf to increase contributions.”
Also bad news: Even those who come in at the higher end of the salary range just aren’t putting enough away. And “only wealthier participants at the higher end of the average contribution rate spectrum are even approaching the savings rate of at least 10% recommended by many industry experts,” the report adds.
Other problems include loans — with middle-income earners the most likely to take them — and big withdrawals on retirement, with lower-income workers most likely to take larger post-retirement withdrawals compared with their better-paid colleagues.
And one more issue: Most participants take big withdrawals soon after retiring, with the average participant withdrawing more than 55% in any given year at or soon after retirement. In fact, research shows that withdrawals once participants reach 59½ were substantially higher than general industry expectations. Also, only 28% of participants are still in their retirement plan three years after retirement.
Sponsors, the report suggests, need to do more than just keep employees in the plan. They also need to better educate workers, particularly at the lower and middle salary ranges, as well as put in place auto-escalation features and auto-enrollment, too, if they don’t already have it.
In addition, target-date fund design “needs to take into account the personal nature of retirement spending in the years leading up to retirement and immediately after,” particularly since investors don’t all behave the same way and the suitability of existing TDFs may vary for participants depending on whether they cash out their accounts right away, roll them over into other accounts or use them to fund higher post-retirement spending.