In its paper, JPMorgan claims industry assumptions for target-date funds are oversimplified, overestimating participant salary and deferral rate growth and assuming participants leave balances invested for the duration of their careers. After reviewing its database of 401(k) participants, JPMorgan found the reality is very different.
The company’s research found, on average, participant deferral rates start and 6% and only increase slowly, reaching 8% by age 40 and not reaching 10% until age 55. In addition, the research indicated, on average, participants only receive pay increases every two out of three years and not annually.
The white paper also says target-date fund strategies need to consider the fact that plan loans and early withdrawals are more common than assumed. JPMorgan research found 20% of participants borrow, on average, 15% of their account balance. Additionally, 15% of participants over the age of 59 ½ withdraw, on average, 25% of their retirement assets.
Typical target-date fund strategies do not protect against these greater cash inflows and outflows assumptions, the paper suggests. According to JPMorgan, target-date funds that minimize risk by offering greater diversification among all types of equities can help ensure participants whose savings and investment behaviors mirror these greater assumptions meet the needed income replacement from defined contribution plans (40% of pre-retirement income).
JPMorgan suggests plan sponsors explicitly define the objective they hope to help participants meet via their defined contribution plan, understand their particular participants’ behaviors, then choose a target-date strategy that has the greatest potential for meeting the objective.
For a copy of the white paper email firstname.lastname@example.org .
« Court: SPD can be Benefit Plan Document