‘Made to Stick’

Art by Melinda Beck

Morningstar has published a detailed new white paper titled “Made to Stick: The Drivers of Default Investment Acceptance in Defined Contribution [DC] Plans.”

Written by David Blanchett, head of retirement research, and Daniel Bruns, vice president, product strategy, both with Morningstar Investment Management, the paper analyzes the survey responses of some 46,439 participants across 175 plans, which use 18 different target-date series. According to the analysis, approximately 80% of participants initially accept target-date funds (TDFs) when those are offered as the default investment, although acceptance declines to approximately 70% after five years of participation in the plan.

“While we find that certain target-date attributes do have a relation to default investment acceptance, they tend to be less important than certain demographic variables such as income and balance,” Blanchett says. In other words, examining the characteristics of the plan population will tell more about the use of default target-date funds than will examining the characteristics of the default fund itself.

Blanchett notes that the findings do show that default investment acceptance increases marginally for target-date funds with lower expense ratios, lower levels of equity risk and higher relative performance, expense ratio having the largest effect among the three. In terms of practical takeaways, Blanchett says, participant age has an “interesting effect” on default acceptance rates.

“Older people are less likely to accept a default investment, but it’s not simply because they’re older,” he says. “Almost the entire effect comes about because older participants tend to have higher balances and higher incomes than those who are younger. When you control for age, income and balance, default acceptance is pretty much the same for all ages.”

Therefore, Blanchett says, the research shows it is important to understand the underlying drivers of behavior. “If you just think default acceptance diminishes with age, you’re missing the deeper point,” he says. “If you have a plan with an older population that has lower income and lower balances, the patterns of behavior could be totally different than in a plan where you have mainly high-balance, high-income older employees.”