In a new white paper, “Retirement Reset: How re-enrollment can help strengthen U.S. retirement security,” J.P. Morgan Asset Management celebrates the advances that the Pension Protection Act brought forth when it was passed 10 years ago. Most notably, it paved the way for automatic enrollment and automatic escalation and the development of target-date funds and other appropriate asset allocation portfolios as the qualified default investment alternative (QDIA), J.P. Morgan says.This has led to considerable progress for defined contribution (DC) plan participants—but the fact remains that “many Americans remain woefully unprepared for a retirement that may last upwards of 30 years,” the investment firm says.
As John Galateria, head of North America Institutional at J.P. Morgan, says: “The Pension Protection Act sets a strong foundation and made great strides, creating new opportunities for stronger DC plans and greater potential for increased retirement security. But the reality is the U.S. retirement system is still falling short. Although some progress has been made on the savings front, advances have been far more limited in getting participant assets allocated appropriately to help get them across the retirement finish line.”
NEXT: The value of re-enrollment
J.P. Morgan reminds plan sponsors of the value of re-enrollment, particularly into a TDF or age-appropriate asset allocation model. The white paper notes that “for plan sponsors, a re-enrollment can bolster confidence that participants are on a sensible investing path—and have a decent chance of staying on the path. Re-enrollment may also provide stronger protection from investing liability. We believe that for both participants and plan sponsors, re-enrollment offers clear, tangible benefits. This strategy quickly improves asset allocation for many participants, especially when the plan’s QDIA is a target-date fund.”
J.P. Morgan looked at the returns of a TDF over a 25-year span starting in 1990 compared to a money market fund. Even with the downturn in 2008 and the subsequent lower returns in the U.S. equity market, the TDF portfolio strongly outperformed the money market fund.
Surprisingly, J.P. Morgan says, only 7% of plans have conducted a re-enrollment. In line with this, the firm urges plan sponsors to ensure that participants are saving enough and saving early enough—particularly as most sponsors default participants at a 3% average annual deferral rate.
In conclusion, J.P. Morgan says, “We are pleased to see that a growing number of asset managers have become strong public advocates of re-enrollment. We urge all plan sponsors, regardless of their chosen asset manager or recordkeeper, to work with their financial advisers/consultants and legal advisers to actively consider how re-enrollment can bolster their DC plans and may give their employees a better chance of a successful retirement.”
J.P. Morgan’s white paper, “Retirement Reset,” can be downloaded here.