Client Service September 27, 2018

DC Plan Features Appreciated by Participants Who Want Saving and Investing Help

Sixty-one percent of all participants surveyed by J.P. Morgan agreed with the statement, “If I could push an ‘easy’ button for retirement and completely hand over my retirement planning and investing to a financial professional, I would.”

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Fifty-two percent of participants surveyed by J.P. Morgan expect to be able to retire at their ideal retirement age, and the same percentage somewhat or strongly agree that their savings will last throughout their lifetime, up from 41% and 44%, respectively in 2016.

However, despite the increase in confidence, only 40% are very or extremely confident they know how much to put into their defined contribution (DC) retirement plan to be on tract to reach their retirement goals. Only 39% are very or extremely confident in estimating how much they will have in their plan by retirement age if they continue investing at the same level, and only one-third (34%) expressed the same confidence in knowing how much monthly income their savings will provide in retirement.

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Seventy-three percent of participants think they should be saving 10% or more to be on track for a secure retirement, but 70% are falling short on that savings target.

Guidance on saving

Nearly six in 10 respondents to the survey (58%) somewhat or strongly agree that their employer should provide a viewpoint on how much employees should contribute to their DC plans. Forty-four percent say employers should notify them if they are not saving enough, and 19% say employers should decide their savings rate on their behalf.

Asked to select the best way for an employer to motivate them to contribute more to their retirement plan and reach their retirement goals, 36% chose knowing the amount they should be contributing now from each paycheck—and how much more they need to save.

The survey finds that the employer match has a strong influence on participant deferral rates. Thirty percent view the percentage of salary matched as a contribution recommendation, and 19% interpret the percentage as what their employer “thinks they should be saving.” One-fifth (21%) set their 2017 deferral rate to what the employer will match.

Many plan features, some of which plan sponsors fear making, are supported by employees to help them achieve their retirement savings goals. For example, J.P. Morgan found 40% of participants agree that stretching the match from 100% of up to 6% of deferrals to 50% of up to 12% of deferrals would be most effective in helping encourage employees to save more.

According to previous J.P. Morgan research, one-quarter of plan sponsors are not implementing automatic enrollment due to fear of participant pushback; however, the new survey shows 82% of participants are in favor of or neutral toward automatic enrollment at a 6% default deferral rate. Likewise, the previous survey found 20% of plan sponsors are not implementing automatic deferral escalation due to fear of participant backlash, but 80% of respondents to the current survey are in favor of or neutral toward a 2% increase in deferrals each year until a 10% savings rate is reached.

J.P. Morgan found 62% of participants with both automatic features expect to be able to retire when they want versus 46% of those who were only automatically enrolled, and 80% of participants with both automatic features expect their savings to last throughout their lifetime versus 47% of those who were only automatically enrolled.

Guidance on investing

According to the survey findings, 60% of participants are “do-it-for-me” investors who prefer to leave investment decisions to investment professionals, while 40% want to take a more hands-on approach to investment decisions.

Yet, even these “do-it-yourself” investors lack some confidence in certain investment decisions. Only 37% of hands-on investors say they are very or extremely confident in which DC plan investment options they should choose, and only 44% say the same about how to adjust the way their plan assets are invested the closer they get to retirement. This compares to 32% and 35% of “do-it-for-me” investors, respectively.

Sixty-one percent of all participants surveyed agreed with the statement, “If I could push an ‘easy’ button for retirement and completely hand over my retirement planning and investing to a financial professional, I would.” Thirty-seven percent indicate that their employer has an obligation to help them pick the right investments in their DC plan, while 20% say their employer should decide their investment choices on their behalf.

The survey finds target-date funds (TDFs) are highly valued by participants: 88% find them appealing and, among those who say their employer offers TDFs, 71% are invested in them. Among “do-it-for-me” investors, 93% find them appealing and, when they are available in the plan, 81% invest in them.

However, even among “do it yourself” investors, 81% find TDFs appealing and, if they are offered in the plan, 54% invest in them.

In addition, fear of employee pushback was the most frequently cited reason for not conducting a re-enrollment among the 87% of plan sponsors who have not yet done so, yet 86% of participants (90% of “do-it-for-me” investors and 79% of “do-it-yourselfers”) are in favor of or at least neutral toward these strategies. Eighty-three percent of participants who went through a re-enrollment with a TDF as the qualified default investment alternative (QDIA) allowed their assets to be moved, and 99% of those who allowed their assets to be moved are satisfied.

More findings from the J.P. Morgan 2018 Defined Contribution Plan Participant Survey may be found here.
The Markets September 27, 2018

PANC 2018: Stable Value Fund Mechanics

Ten years after the Great Recession, there continues to be a great focus on the best way to handle capital preservation on the DC retirement plan menu.

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On the second day of the 2018 PLANADVISER National Conference in Orlando, William McLaren, vice president and stable value business leader for Lincoln Financial Group, offered a crash course on the current opportunities and challenges associated with offering stable value funds on retirement plan menus.

As McLaren pointed out, U.S. retirement investors are now 10 years out of the Great Recession, but there remains a great focus on capital preservation, particularly as interest rates slowly but steadily increase.

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“Stable value is an important product set to monitor as rates increase,” McLaren suggested. “Stable value can help protect retirement investors’ dollars as the rate environment heats up.”

Thinking back over several decades, McLaren explained how the overall long-term secular decline in interest rates drove a common perception that bonds are always safe for protecting an investor’s capital. But those with the long-view know this is not true—and those with a short-view are learning as much right now. Rising rates are causing negative book value returns in various types of bond funds.

“It’s a real surprise to some folks to see the value of their bond portfolios respond negatively to interest rate hikes,” McLaren said. “Simply put, many individuals in the markets today do not understand interest rate risk.”

Assessing the stable value marketplace 

McLaren went on to offer a refresher about the basic flavors of stable value that are available, and how these differ from one another. In general, the term stable value can refer to three types of product structures.

First is individually or separately managed accounts. These are customized to meet the objectives of a single plan and do not include assets of other plans.

“This stable value product set is generally limited to plans with $100 million or more in just stable value assets alone, so very large plans,” McLaren explained. “One of the big benefits, besides the economy of scale, is how this type of stable value product provides full transparency of fees and underlying assets, being a custom-made solution.”

The second type of stable value product are constructed as commingled pools, designed to combine the assets of unrelated plans in a complementary way, enabling them to gain economies of scale similar to the separately managed accounts but with some important differences.

“Generally this type of stable value fund employs a multiple wrap structure, which diversifies risk but also makes it more complicated to manage and to do the due diligence,” McLaren noted.

Finally, there are stable value products structured around guaranteed insurance company accounts. These products invest in a single group annuity contract issued directly to the plan.

“This is the oldest and largest segment of the stable value market,” McLaren said. “This is where the insurance company provides a direct guarantee to the plan sponsor. These can be created only once the insurance company gets approval from insurance regulators in their home state. They next have to go state by state to get approval. Because of the challenge of doing this work, you want to make sure of the issuing firm’s long-term commitment to the asset class.”

As McLaren said, depending on the plan sponsor client, one of these options will likely be most appropriate. To help clients define which approach is best, McLaren suggested the following questions be asked: “What is most important to you in protecting your assets? When was the last time you did a fiduciary review of the current stable value investment option? Are you fully aware of the details about fees, liquidity, disclosure support, and portfolio and contract characteristics?”

McLaren concluded by emphasizing how understanding the structure of stable value funds requires looking at contract terms beyond just the crediting rate.

“Plan sponsors must understand what is covered, what is not covered,” he warned. “One thing that surprises people is that merger and acquisition activity can have an impact on the stable value fund that must be considered. Clients should establish a policy that ensures periodic evaluation, selection, oversight and monitoring on a proactive basis. They must get under the hood and study the fixed-income strategy as it exists right now, and where it is going in the next six to 12 months. The Department of Labor’s guidance in Notice 95-1 is a good monitoring framework to follow. It is actually about assessing annuity providers used in a DB termination, but it is a reasonable proxy framework to use for selecting and monitoring a stable value provider.”

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