And the strength of the defined contribution (DC) system continues to improve thanks to oversight by regulators and fiduciaries, the involvement of professional advisers and consultants, and the intense pressure of the market competition between service and product providers. Indeed, it is in large part due to these forces that participants in DC plans today have access to institutionally priced investments, and administrative fees continue to fall despite increases in services and value rendered.
That said, the fees and expenses associated with defined contribution investments and services continue to be heavily scrutinized in Washington, academic research, and the media. This type of public discourse can be positive when it helps sponsors and participants become more informed consumers of retirement products and services. However, emphasis on fees without the broader context of asset allocation principles, investor behavior, and most importantly, value delivered, may lead to some dramatic unintended consequences.
Emotions drive human behavior much more than any of us care to admit and people often feel emotional about the fees they pay. However, anchoring savings and investment decisions solely on the cost of retirement products and services could significantly hamper the long-term success of America’s retirement savers.
To the untrained eye, a quick scan of today’s headlines might lead a participant to believe that:
- Their employer-sponsored plan is a more expensive way to save and invest relative to other out-of-plan alternatives—regardless of the institutional pricing, educational services, fiduciary oversight, and other valuable services they receive as a plan participant;
- The lowest cost investment funds will enable savers to maximize their long-term returns—regardless of their asset allocation, the skill of the investment manager, or the limitations of certain index-based investment approaches;
- Fees represent the greatest risk of a retirement shortfall—despite the fact that too many Americans are not saving enough, early enough; and
- Saving and investing for retirement is too complex and fraught with risk—leading individuals to simply disengage rather than embrace the high quality guidance and professionally managed solutions afforded through their workplace retirement plan.
Fortunately there are many trained eyes, in the form of dedicated plan sponsors, retirement advisers and providers, who are alert to the consequences of these misperceptions and who work hard to balance the perspective.
Communicating with Participants
Our experience tells us that the best way to keep participants focused is through consistent and repeatable communications. These communications should reinforce the key tenets of successful retirement preparedness: the decisions participants make today will drive retirement outcomes, and the longer participants put off saving, the harder it will be for them to reach their goals. The adoption of popular plan features such as automatic enrollment, automatic contribution escalation and defaulting investments into age-appropriate, professionally managed solutions drive results by making participant choice as simple as possible. Similarly, strong participant communications drive results when they focus on simple messages. Messages centered on income replacement, for example, are among the most effective at driving participant action and improved retirement outcomes.
One of the best ways to encourage an understanding of asset allocation is to focus on portfolio rates of return. A focus on individual fund performance can be confusing or encourage the chasing of returns rather than disciplined diversification. Instead, encouraging individuals to compare their overall returns, net of fees, to that of a diversified portfolio appropriate for their age is a good way to simply evaluate whether an investment strategy is generating the long-term gains needed for a successful retirement.
Value Is What You Get
As Warren Buffett so famously said, “Price is what you pay, value is what you get.” Plan sponsors should expect their providers and advisers to continue to demonstrate the value of their services as part of ongoing plan reviews. Participants, in turn, should receive ongoing communications about the costs and benefits of investing in a DC plan. Doing this, all of us in the retirement industry can be justifiably proud of the valuable products and services we provide to help millions of Americans achieve their retirement goals.
David Musto is Chief Executive Officer of J.P. Morgan Retirement Plan Services, a division of J.P. Morgan Asset Management, which provides fully bundled defined contribution and defined benefit services and is the eighth-largest defined contribution recordkeeper in the United States.
Diversification does not guarantee investment returns and does not eliminate the risk of loss.
J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co., and its affiliates worldwide.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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