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Defined Contribution

Top default funds for U.K. DC plans vary widely in returns — analysis

Participants of defined contribution plans in the U.K. are getting widely varying returns on default funds, research by JLT Employee Benefits found.

The annualized performance of 10 top-performing default funds varied from 6.3% to 12.5% before fees in the five years since 2012 when automatic enrollment started, according to data as of Sept. 30 compiled by JLT. About 92% of participants are invested in these funds, which are typically lifecycle funds.

"The disparity in strategies and risk-return profiles could lead to a huge retirement shortfall, amounting to the equivalent of a property. It is alarming to see that the situation hasn't improved since we raised this issue two years ago," said Maria Nazarova-Doyle, head of DC investment consulting at JLT Employee Benefits, in a news release.

"It is tempting for employers to focus on keeping costs down, which is entirely understandable, but it shouldn't be to the detriment of fund selection. Statutory contributions are set to quadruple from 2% to 8% in the next two years and this would have a limited impact if it isn't backed up with sound investment decisions," Ms. Nazarova-Doyle added in the release.

According to the research, participants could be saving an additional 300 million ($402 million) if U.K. employers monitor the performance of default funds and changed managers if such performance dropped.

The research also found that the funds that had better returns in 2015 did not remain top performers through 2017.