Defined contribution plan participants have been exposed to more financial market risk by the increased use of target-date fund strategies as default investment options and away from more secure investments, according to a new study by Greenwich Associates.
According to the report, “U.S. Defined Contribution Pension Plan Research Study,” from 2007 to 2008, the share of plan sponsors using money-market or stable-value funds as their default investment option dropped to 19% from 35%, while the share of plans using target retirement date funds jumped to 53% from 35%.
Analysts at Greenwich reported a large number of employees took on exposure to financial markets in general and to equity markets in particular virtually on the eve of the biggest market collapse in 70 years, a news release about the study said.
“It’s like a bad Greek tragedy,” Chris McNickle, consultant at Greenwich Associates, said in the news release.
The move by plan sponsors to automatic enrollment has exacerbated this trend, the study noted, as more than 40% of large plans and 50% of small plans have implemented automatic enrollment.
The study also reported the proportion of large DC plan sponsors offering matching contributions declined slightly to 92% in 2008 from 94% in 2007. Consultants at Greenwich Associates are advising companies to make every effort to maintain their matching contributions and to cut or eliminate them only as a last possible option.
