NEW YORK Selecting target-date funds just got more complicated.
Industry experts have been beating the drum for better diversification of target-date funds since the Department of Labor included the funds as a qualified default investment alternative. Now, a new JPMorgan study says 401(k) plan executives also need to consider the behavior of participants in their particular industry.
Anne Lester, managing director and senior portfolio manager of the global multiasset group at JPMorgan Asset Management, New York, said automatic solutions are clearly not the sole answer, especially when looking at specific industries.
Automatic enrollment and automatic escalation of contributions have been championed by industry officials and were endorsed by the Department of Labor in the Pension Protection Act of 2006. Target-date funds, managed accounts and balanced funds were deemed qualified default investment alternatives and, so far, the majority of plan executives are choosing target-date funds.
Theres been a lot of excitement about the PPA and theres a growing sense of hope that those provisions will help participants retire comfortably. But we are pessimistic about this. While we think that (automatic solutions) are critical, we are not sure it will transform retirement savings, Ms. Lester said.
In the new study, executives at JPMorgan expand on previous research that showed 401(k) plan participants wont have a big enough nest egg if invested in poorly diversified target-date funds.
That study, Ready! Fire! Aim?, recommended that plan executives needed to think beyond the equity glide path and instead think in terms of an asset allocation glide path which incorporates other asset classes into the mix.
In its most recent study Sharpening Your Aim: Selecting the Best Target Date Strategy for Your Participants JPMorgan found that participants, particularly in consumer staples and health care, need target-date solutions that provide sufficient downside protection.
JPMorgan looked at 10 industries financials, consumer staples, consumer durables, consumer services, materials, energy, utilities, health care, information technology and industrials and measured four behaviors: salary, contributions, 401(k) loans and withdrawals.
Some of the more important findings, said Ms. Lester, are that 15% of participants borrow an average of 15% of their account balance and 20% of participants older than 59½ withdraw an average of 25% of assets before retirement.
Breaking it down by industry is critical, she said, as plan executives need to understand their participants behaviors. Participants in specific industries have specific behaviors, she said.