Target-date funds, battered by a rough market in 2008, continue to face the problems of attracting consistent contributions from participants, controlling the amount of pre-retirement distributions and discouraging investors from bailing out after they retire.
“Participants on average are clearly not saving enough for their retirement needs, and our current research shows this may be getting worse for a sizable number of investors,” said a new research report from J.P. Morgan Asset Management, New York.
“The 'wow' moment for me” was the new survey's tracking participants over time, Anne Lester, a managing director and co-author of the research, said in an interview. The research followed people over 65 who stopped working in 2006 and remained invested in their plans. From 100% invested in December 2005, the percentage dropped to 62% the next year, to 33% in December 2007 and to 19% by December 2008.
Even though target-date funds, including what Morningstar Inc. calls the “much-maligned” 2010-fund group, made a comeback in 2009 because of a rising stock market, the money manager's findings are powerful reminders that developers of target-date funds must be more sensitive to participants' attitudes about investing and saving in an uncertain economy.
Otherwise, participants will be disappointed with these funds, many of which, the report said, “have too much volatility embedded in their portfolio design.”
However, the good news is that the bad news wasn't as bad as JPMAM executives had feared. Several indicators are “marginally worse,” Ms. Lester said. “On the flip side, it didn't get that much worse.”
The latest study analyzes 2007 and 2008, building on JPMAM's research published in 2007 that covered 2001 through 2006.
The first survey was more surprising to Ms. Lester because it showed a big gap between what the report called “simplified industry assumptions” and marketplace reality. The company's J.P. Morgan Retirement Plan Services unit, record keeper to more than 350 defined contribution plans with 1.7 million participants, provided the raw data about target-date funds and other funds for this research.
In the first survey, conventional wisdom about annual salary raises, contribution rates, participant borrowing, premature distributions and post-retirement withdrawals often differed dramatically from what researchers found.
For example, the industry assumption that participants would withdraw a consistent 4% to 5% annually wasn't in the same ballpark as the finding that the average participant withdraws more than 20% per year at or soon after retirement.
The industry assumption that participants don't borrow from their funds clashed with the first survey's finding that 20% of participants borrow on average 15% of their account balance. The most recent research found that in 2008, 17% of participants borrowed on average 25% of their account balance. Ms. Lester said she is concerned that borrowers will stop contributing to their retirement plans while they pay off the loans.
“The most disturbing finding to me was the lower savings rate,” Ms. Lester said. The initial industry assumption was that participant contributions start at 6%, increase steadily and reach 10% of salary by age 35.
The earlier research found contributions started at 6%, reached 8% by age 40 and reached 10% by age 55. The most recent research found, however, that the average contribution rate started at 5.7%, rose to 8% of salary by age 45, and reached the 10% level at age 57.
“These differences may seem insignificant, but they may have sizable compounding effects,” the JPMAM report said. “This potentially disturbing trend could force younger investors to play a difficult game of 'retirement catch-up' in their 40s and 50s.”
