J.P. Morgan Asset Management has updated its “Ready! Fire! Aim?” research series for 2016, examining how the relationship between target-date fund (TDF) glide paths and participant behaviors shapes long-term defined contribution (DC) portfolio outcomes.

Talking through the research results with PLANADVISER, Dan Oldroyd, portfolio manager and head of J.P. Morgan’s target-date strategies, notes that participant behavior in the last few years was “much more varied and volatile than many target-date fund providers have assumed in their asset allocation models.” Examples of “varied and volatile” behaviors include things like over-active trading during periods of market stress or buying into a TDF with an inappropriate retirement date, Oldroyd explains. Other participants have reduced their contributions, have taken loans or have been opted into plans for the first time at a grossly insufficient salary deferral level.

“The prevalence of such behaviors led us to consider potentially significant ramifications for whether participants were likely to meet their retirement funding needs,” Oldroyd explains. He adds that he is personally excited about this third update to the research series, “which now provides more than 10 years of data examining how participant behavior, such as the size and timing of portfolio cash flows, interacts with the size and timing of market returns.”

Oldroyd says the data clearly shows salary levels and raises are crucial behavioral inputs for predicting TDF investor success, “because income levels influence contribution amounts, as well as the standard of living that needs to be replaced in retirement.” Not surprising, those TDF investors receiving regular raises and with higher salaries to begin with are having greater success getting retirement ready via the investment markets. Unfortunately, Oldroyd notes, the latest data shows that “average raise frequency has declined to pre-crisis levels because … earlier increases were mainly caused by an apparent salary catch-up from the post-crisis slowdown.”

In other words, people aren’t getting raises quite as often these days compared with the last decade, requiring portfolio managers to reassess their glide path structures due to lower anticipated future contributions. Additionally, average raise size declined somewhat in the last 12 months as well, Oldroyd notes, but the average raise still remained slightly above inflation

“This is good thing, but it’s a relatively low bar given persistently low inflation,” he says.

NEXT: Headwinds and hurdles, with some optimism  

Tied to the slowing raises, J.P. Morgan finds the average starting contribution rate to target-date funds and other retirement plan investments continues to fall, “with subsequent average increases rising much more slowly.”

The lesson for plan sponsors and advisers in all this, Oldroyd says, is that simply getting someone into a TDF or another style of professionally managed investment is not enough to drive retirement readiness, or even rational investment behavior. “The only way participants can be certain to achieve adequate income in retirement is to save enough during their working years and to stick to a well-crafted investing plan,” Oldroyd says. “Disappointingly, average starting contributions remain at the lowest point since we began our research, and rise much more slowly than in the earlier studies.”

The J.P. Morgan Asset Management data also shows large number of participants continue to take sizable account loans, further dragging down retirement readiness. In fact, the percentage of participants tapping into retirement accounts pre-retirement has risen to the highest level since the “Ready! Fire! Aim?” series began tracking participant behavior, Oldroyd observes. “One positive note is that the average percentage borrowed has modestly fallen,” he adds, “likely due to generally higher account balances after years of rising markets.”

Looking across the retirement planning landscape, the report concludes “a sizable portion of participant assets that could be invested are not actually invested in any given year,” largely due to poor participant decisionmaking. For example, many participants stop making contributions while repaying loans, Oldroyd says, and just as damaging, “pre-retirement leakage remains unpredictable,” with participants across demographic groups and income levels seemingly all more likely to take pre-retirement loans.

“The good news is that there appear to be fewer hardship withdrawals as the economy continues to stabilize, but there are also more loans and pre-retirement withdrawals, which could jeopardize long-term savings,” Oldroyd says. “Indeed, the percentage of working participants over age 59½ taking a portion of their account balance and the average percentage withdrawn have both risen to the highest levels in the past 14 years.”

Looking at the back-end of the savings effort, J.P. Morgan finds most participants withdraw their entire account balances once they stop working, usually in a single withdrawal. The majority of participants, nearly 70%, are leaving their plans soon after retirement. “However, in this latest study, the team observed that the percentage of participants staying in their plans almost doubled,” Oldroyd says, “from 17% post-2008 to 32% in recent years.”

The full research results are reported here.