Far too many benefit plans expose their members nearing retirement to risky investment strategies that could seriously compromise their financial position in retirement.
Why and how? The why: Planners are on autopilot, not thinking about group characteristics. The how: They select inappropriate target date funds (TDFs) for plan members.
This alarming statement is the result of research conducted by two Morningstar retirement planning experts.
They started with the theoretical justification of the different TDFs. “TDFs adjust investments based on a participant’s age or expected retirement date, typically moving from more stocks to more bonds as participants get closer. of retirement. Out-of-the-box TDFs are not personalized, but come with the same path to multiple plans,” says Morningstar.
They then reviewed available information on the 2019 plan, studying whether plan members tended to withdraw most of their 401(k) dollars upon retirement, or generally left it sitting in their account after retirement, drawing from conservatively, and whether the TDFs seemed to reflect plan members. real choices about how to deploy their funds.
“Across all plans, we find that 58% of defined contribution plan assets are invested in standard TDFs. Standard TDFs are not custom, but come with the same descent path to multiple planes. »
In other words, the plan’s administrators made little or no effort to see whether plan participants opted out upon retirement or whether they kept it after retirement. And that would be important information to have when determining the asset mix of a portfolio at retirement age.
In 2013, the US Department of Labor (DOL) released guidance for plan trustees regarding TDFs. He advised them to “determine whether the characteristics of TDFs fit well with the population of plan members.” Things like salary levels, turnover rates, likely retirement dates and employee ages need to be considered, according to the DOL. Plan sponsors should consider whether a “to” or “through” glide path is appropriate for an individual, says the DOL, because “if employees do not understand the fund’s glide path assumptions when investing, they may be surprised later if this turns out not to be a good fit for them.
Morningstar’s research found that far too many plans don’t take individual journeys into account. They simply load a ready-made TDF into the plan and send plan members on their way. So instead of doing the most conservative thing – selecting TDFs for plan members that match their goals – it’s one-size-fits-all TDFs.
“Plan sponsors overwhelmingly choose ‘through’ glide paths, which account for 86% of TDF’s assets,” Morningstar reports. “This implies that plan sponsors expect their members to retire using these strategies.”
The problem is that many people want to extract their dough when they stop working. And if the market crashes (as it did recently) just before you leave the company, the value of your portfolio plummets at the wrong time.
Related: Redefining Retirement with $1.8 Million in Savings
Morningstar’s research is comprehensive and detailed, examining trends by industry, plan size, decisions members need to make or expect, and more. But the bottom line is clear: plan sponsors have a responsibility to do better for their members. They need to help them retire the way they choose, and the portfolios need to be managed accordingly. Ready-to-wear is not appropriate given the importance of the situation.
“Generally, the evidence suggests that many plan sponsors don’t make major adjustments” based on participants’ actions and goals. The researchers offer three recommendations:
- Plan sponsors and advisors should routinely consider key assumptions in their glide paths and their actual experience of participant behavior, as the Department of Labor suggested in its guidance in 2013.
- The Department of Labor should consider whether more guidance could help clarify the role sponsors should play, particularly in their review and assessment of glide paths, given the differences we see between sectors. The ministry may also recommend that plan sponsors consider TDFs alongside other QDIA options.
- The Department of Labor should consider issuing additional guidance or even changing the Safe Harbor on the use of custom glide paths.