Whether it's because of laziness or neglect, enrollee inertia has long been a problem in the retirement plan world. But employers that try the re-enrollment route are having better luck addressing the problem.
J.P. Morgan Asset Management has produced a white paper saying sponsors that have done so have seen a 55 percent to 85 percent adoption rate of target-date funds.
By contrast, sponsors that merely add TDF options to investment menus without re-enrolling participants are seeing an adoption rate of just 5 percent, it said.
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J.P. Morgan says the case for TDFs, and re-enrollment, also makes good sense, because two-thirds of sponsors are not confident in how their employees are allocating retirement savings.
Participants' faith in their own ability to allocate funds is even shakier: 76 percent are not confident in how they invest their savings.
Yet 80 percent of total 401(k) assets remain in core menu investment options from which enrollees allocate their own investments; only 18 percent of assets are in Qualified Default Investment Alternatives like TDFs.
J.P Morgan says the result is that far too many younger enrollees have too little invested in stocks, and far too many older workers have too much invested in stocks.
While sponsors are well positioned to default new hires into age-appropriate TDFs, its white paper says re-enrollment for existing participants is necessary to help workers "who could benefit from professionally managed solutions by defaulting into age-appropriate portfolios, while still allowing more sophisticated and active participants to make their own investment decisions."
Doing so could greatly reduce the volatility that the paper argues too many participants unknowingly expose themselves to, it said.
A five-year study of high, low and average returns shows that TDF investors enjoy a higher median return and far less downside risk compared to the "do-it-yourselfers" in company plans, J.P. Morgan said.
Over the period, TDF investors averaged a 13.9 percent return, compared to 12.9 percent for do-it-yourselfers.
But the real distinction in performance is seen in the lowest range of returns.
At their least productive, TDFs over the period returned 8.5 percent, while do-it-yourselfers lost 2.2 percent of their assets' value.
"Re-enrolling participants into investment options that provide professional management and increasingly conservative risk/return profiles as retirement approaches not only helps to improve asset allocation, but also maintains an appropriate allocation over time," J.P. Morgan wrote in a white paper.
"These options help minimize extreme outcomes — providing participants with a more consistent investment experience than the portfolios individually constructed by most 'do-it-yourselfers'."
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
