Participant Behaviors Can Inform Better Plan Design

J.P. Morgan makes recommendations for plan design and TDFs based on savings and withdrawal behaviors it analyzed.

J.P. Morgan Asset Management’s latest “Ready! Fire! Aim?” report found that automatic enrollment continues to expand participant engagement in 401(k) plans, particularly among younger investors.

More than half of 25-year-old participants investing in a plan were automatically enrolled. J.P. Morgan Asset Management says it is important for sponsors to pair that with automatic escalation.

Contribution rates remain too low. A sizable segment of participants are starting their average contributions at a minimum 3.3% rate and failing to take any additional action to increase that. Even participants earning large salaries are contributing too little, J.P. Morgan says. Only wealthier participants at the higher end of the average contribution rate spectrum are approaching the savings rate of at least 10% recommended by many experts.

Middle income workers are the most likely to take out a loan from their retirement account. Additionally, the majority of participants make substantial withdrawals soon after retiring. In fact, the average participant withdrew more than 55% of their balance in any given year at or soon after retirement. In addition, only 28% of participants remain in their retirement plan three years after retirement.

J.P. Morgan recommends that sponsors consider much higher deferral rates and escalation rates. Additionally, the firm recommends that sponsors educate middle- and lower-income workers about the need to save more and avoid loans.

J.P. Morgan also says target-date fund (TDF) design needs to take into account the personal nature of retirement spending in the years leading up to retirement and immediately after. Participant withdrawal behaviors vary widely, from those who quickly cash out of their account, 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 advisers should incorporate the full range of these behaviors into plan design, including evaluating appropriate levels of equity exposure in TDF glide paths, scaling back equity exposure in the years leading up to and immediately after retiring.

“The latest ‘Ready! Fire! Aim?’ report reveals that many plan participants still aren’t positioned for retirement income success despite the efforts of plan sponsors, their advisers and plan providers,” says Anne Lester, portfolio manager and global head of retirement solutions at J.P. Morgan Asset Management. “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.”