401(k) Specialist Issue 1 - 2019 - 34

401(k) PRODUCTS
They quickly course-corrected, and drew
plaudits not only for their performance
overall, but also for their role in minimizing
the more destructive behavior displayed by
participants during market shocks (2008),
which one well-known analyst attributed to
their " boring structure. "
Fast-forward to 2017, when they hit the
all-important $1 trillion asset mark, and
remain a popular staple of 401(k) investment
menus today.
" Use of target-date strategies in DC
plans continues to grow, " Vanguard noted in
its high-profile and widely-cited How America
Saves 2018. " Nine in 10 plan sponsors offered
target-date funds at year-end 2017, up more
than 50 percent compared with year-end
2007. "
Nearly all Vanguard participants (97 percent)
are in plans offering target-date funds,
an important marker given the investment
behemoth's size and scope.
Consider:
* 75 percent of all participants use target-date
funds.
* 66 percent of participants owning target-date
funds have their entire account
invested in a single target-date fund.
* 51 percent of all Vanguard participants
are wholly invested in a single target-date
fund, either by voluntary choice or by
default.
And, of course, the qualified default investment
alternative (QDIA) regulations " promulgated
under the PPA continue to influence
adoption of target-date funds. That said, however,
voluntary choice is still important, with
half of single target-date investors choosing
the funds on their own, not through default. "
Strong numbers, to be sure, but debates
nonetheless continue to rage about their
effectiveness, use and proper deployment
in the retirement portfolio overall.
Should they contain a portion, or all, of the
retirement portfolio assets? If some remain
invested elsewhere, does it defeat the product's
intended purpose by messing with its underlying
mechanism?
More generally, and as Christine
Benz, Morningstar's director of personal
finance, recently asked, do target-date funds as
currently situated and constructed help solve
34
ISSUE 1 2019 | 401kSpecialist.com
for the issues that retirees face, or is there more
work to be done?
Manufacturers have responded with products
and services to meet most participant
investing styles, suitability and demands, but is
it enough?
Maybe not.
J.P. Morgan found that, despite reports from
large TPAs of " record account balances " and
" skyrocketing deferral rates, " participant problem
areas persist, including not enough savings
to see them successfully through retirement,
spending too quickly while in retirement and
the use of 401(k) loans in the lead-up to
retirement.
Simply put, participants still aren't positioned
for retirement income success despite
the best efforts of plan sponsors, their
advisors and plan providers, according to the
firm.
It has implications specifically for target-date
design, J.P. Morgan argues, before
diplomatically adding that participant
behavior is " much more varied and volatile
than many target-date fund providers assume,
with significant ramifications around retirement
outcomes. "
Anne Lester, a portfolio manager and the
firm's Global Head of Retirement Solutions,
says it demonstrates the need " for plan
sponsors to take into account the personal
nature of retirement saving and spending in
plan design. "
Noting that participant withdrawal behaviors
" vary widely, from those who quickly
cash out their accounts, to those who rollover
their assets into other retirement accounts, and
those who use them to help fund increased
post-retirement spending, " plan sponsors and
their advisors should incorporate the full
range of these behaviors into plan design.
These include evaluating appropriate
levels of equity exposure in target-date fund
glidepaths.
" It's also critical for target-date fund managers
to develop asset allocation models that
reflect the fact that participant assets are most
vulnerable to account losses in the years leading
up to retirement and immediately after. "
Undoubtedly all important and useful
information, but is " fixing " target-date funds
necessarily the issue, or is it simply the
evergreen and ongoing matter of employee
financial education (or lack thereof)?
Despite their admitted popularity, the
public maintains a shockingly low level of
knowledge about what they are, what they
do and how they work, as AllianceBernstein
recently found.
" TDFs are increasingly prevalent in DC
plans, and many participants use and appreciate
them, " the firm wrote in its 2018 Inside
the Minds of Plan Participants survey. " But despite
familiarity and appeal, TDFs are still not
well understood. TDF users are now giving
wrong answers more frequently than in AB's
2015 survey-and more often than the 2018
TDF nonusers. "
Concerningly, AB reported:
* 48 percent of TDF users incorrectly
believe that their TDFs automatically
guarantee that they'll meet their income
needs in retirement.
* 45 percent of TDF users who believe
TDFs are guaranteed say the year listed
in the fund name tells them their accounts
are guaranteed to be sufficiently
funded in that year.
* 38 percent of TDF users think that the
account balance is guaranteed to never
go down.
Despite these misperceptions, TDF
users " frequently state that these funds are
easy to understand and make them feel
comfortable that they have made a good
choice. "
Which, despite the contradiction, is generally
good and has participants headed in
the right direction.
Ultimately, participants indicated a steady
income stream in retirement was the most
important goal of their plans.
" Retirement income certainty (49 percent)
far outstripped the other options, such
as principal protection, upside potential,
downside protection and a diversified investment
mix, " AB concluded.
And unsurprisingly (given that many
thought they already had it), plan participants
reacted very positively to the idea of
a TDF with a guaranteed income feature.
Ninety-four percent of all employees would
keep some or all of their contributions in a
target-date fund that guaranteed an income
stream for life.
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401(k) Specialist Issue 1 - 2019

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