NEW YORK, Dec. 13, 2018 /PRNewswire/ -- J.P. Morgan Asset
Management today released the latest installment of
its Ready! Fire! Aim? research series,
examining the saving and withdrawal behaviors of defined
contribution plan participants and the implications for target date
fund design. This year's findings continue the trend witnessed over
more than 10 years of Ready! Fire! Aim? research,
revealing that participant behavior is much more varied
and volatile than many target date fund providers assume, with
significant ramifications around retirement outcomes.
"The latest Ready! Fire! Aim? report reveals that
many plan participants still aren't positioned for retirement
income success despite the efforts of plan sponsors, their
advisors, and plan providers. In this year's expanded research, we
also were able to identify and analyze the wide variation in
behavior across income groups, demonstrating the need for plan
sponsors to take into account the personal nature of retirement
saving and spending in plan design," said Anne Lester, Portfolio Manager and Global Head
of Retirement Solutions, J.P. Morgan Asset Management. "It's also
critical for target date fund managers to develop asset allocation
models that reflect the fact that participant assets are most
vulnerable to account losses in the years leading up to retirement
and immediately after."
This year's research included an expanded participant universe,
drawing upon data from MassMutual Financial Group and Empower
Retirement, who are recordkeepers for more than 4,000 defined
contribution plans serving approximately 2 million
participants.
Evaluating Participant Behavior Patterns
Ready!
Fire! Aim? once again finds persistent and wide
variations in saving and investing behavior, impacting the success
of retirement plans. Key behavioral trends among participants in
the latest analysis include:
- Automatic enrollment continues to expand participant
engagement, particularly among younger investors.
More than
half of 25-year old participants investing in a plan were
automatically enrolled, suggesting that some of these participants
may not have invested in the plan otherwise. This large percentage
of younger defaulted participants emphasizes the positive influence
plan sponsors can have by setting employees on a constructive
retirement savings path, while also getting them to start investing
for retirement early in their careers. However, when not paired
with automatic contribution escalation, automatic enrollment on its
own may have unintended consequences.
- On the downside, contribution rates remain too low, driven
by passive participants.
Unfortunately the average
contribution rate for passive participants, those who were
automatically enrolled in the plan and never made contribution
changes, fell significantly below those participants who took
action to adjust their contribution rates. 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. Disappointingly, even at the higher end
of the salary spectrum, many participants are still simply
contributing far too little.
- Middle income earners are most likely to take a loan from
their retirement account.
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. Meanwhile, middle income earners are most likely
to take a loan, and lower-income earners continue to make larger
post-retirement withdrawals relative to the other two segments as
well.
- The majority of participants continue to make substantial
withdrawals soon after retiring.
The research shows that the
average participant withdrew more than 55% in any given year at or
soon after retirement. From an age perspective, the research again
found that withdrawals once participants reach 59½ distributions
were substantially higher than general industry expectations. In
addition, just 28% of participants remain in their retirement plan
three years after retirement.
Implications for Plan Sponsors
In light of the
participant insights revealed in the 2018 Ready! Fire!
Aim? report, there are a number of key learnings for
plan sponsors who seek to improve participant outcomes:
- Plan sponsors may want to look beyond getting employees into
the plan.
While getting employees into the plan is a good
first step, to truly drive retirement funding success plan sponsors
and their advisors may want to focus on encouraging higher
contribution rates. This can be achieved explicitly by implementing
automatic contribution escalation programs at a much higher rate
increase than typically used today.
- Educational efforts should focus on employees at the middle
and lower salary levels
Findings across salary levels
indicate a real need to pay even greater attention to educational
efforts targeting employees at middle and lower salary levels, who
tend to save less, borrow more and withdraw earlier than other
participants. Implementing automatic enrollment and automatic
contribution escalation programs have also proven to be effective
strategies for placing these participants on a more secure
retirement savings path.
- 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.
Participant withdrawal
behaviors vary widely, from those who quickly cash out their
accounts, to those who rollover their assets into other retirement
accounts, and those who use them to help fund increased
post-retirement spending. Plan sponsors and their advisors should
incorporate the full range of these behaviors into plan design,
including evaluating appropriate levels of equity exposure in
target date fund glide paths. It's also critical to keep in mind
that participant assets are most vulnerable to account losses in
the years leading up to retirement and immediately after.
"This edition of the Ready! Fire! Aim? report
confirms our view that a well-designed target date fund offers the
greatest chance of retirement security for the vast majority of
participants," said Daniel Oldroyd,
Head of Target Date Strategies, J.P. Morgan Asset Management. "When
it comes to guiding participants safely over the retirement finish
line, proactive plan design can be just as important as investing
and asset allocation."
"We maintain our position that a broadly diversified glide path
with a focus on dynamic risk management, such as the JPMorgan
SmartRetirement glide path, continues to secure the greatest
number of projected participant retirement funding successes,"
concluded Mr. Oldroyd.
To learn more about J.P. Morgan Asset Management's leading DC
investment strategies, product innovations and resources for
advisors and plan sponsors, please click here, or to view the
full Ready! Fire! Aim? white paper, and
full research methodology, please click here.
About J.P. Morgan Asset Management
J.P. Morgan Asset Management, with assets under management
of $1.8 trillion (as of September 30, 2018), is a
global leader in investment management. J.P. Morgan Asset
Management's clients include institutions, retail investors and
high net worth individuals in every major market throughout the
world. J.P. Morgan Asset Management offers global investment
management in equities, fixed income, real estate, hedge funds,
private equity and liquidity.
JPMorgan Chase & Co. (NYSE: JPM) is a leading global
financial services firm with assets of $2.6 trillion (as
of September 30, 2018) and operations
worldwide. The Firm is a leader in investment banking, financial
services for consumers and small businesses, commercial banking,
financial transaction processing, and asset management. A component
of the Dow Jones Industrial Average, JPMorgan Chase & Co.
serves millions of customers in the United States and
many of the world's most prominent corporate, institutional and
government clients under its J.P. Morgan and Chase brands.
Information about JPMorgan Chase & Co. is available
at www.jpmorganchase.com.
For target date funds the target date is the approximate date
when investors plan to start withdrawing their money. Generally,
the asset allocation of each Fund will change on an annual basis
with the asset allocation becoming more conservative as the Fund
nears the target retirement date. The principal value of the
Fund(s) is not guaranteed at any time, including at the target
date.
J.P. Morgan Asset Management is the marketing name for the asset
management businesses of JPMorgan Chase & Co., and its
affiliates worldwide.
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SOURCE J.P. Morgan Asset Management