Another key finding is that most participants withdraw their entire account balances shortly after they stop working. As of 2011, 83% of participants have withdrawn their entire account balance within just three years of retirement. This has significant implication for the "to" versus "through" glidepath debate in the target date fund industry, as it relates to contention over the appropriate level of equity risk at the point of retirement. These withdrawal figures suggest that maintaining outsized equity allocations in years leading up to retirement subjects participants to unnecessary and dangerous risks just as they are most prone to withdraw their assets.
"It's risky for target date funds to rely heavily on equities, but at the same time they can't curtail long-term return potential by being too conservative. We think the solution is to increase risk efficiency through broader asset class diversification, such as incorporating high yield, direct real estate, emerging market equity and debt and other asset classes to lower expected volatility without sacrificing return potential," said Daniel Oldroyd, Portfolio Manager of JPMorgan SmartRetirement target date strategies, J.P. Morgan Asset Management Global Multi-Asset Group. "A stronger risk-adjusted return profile can also help mitigate the long-term impact of these negative participant behaviors, such as loans and contribution shortfalls, that we see occurring increasingly among savers."
Comparing Target Date Fund Designs, Combating Suboptimal Behaviors
Having a well-designed target date fund offers the greatest chance of retirement security for the vast majority of participants. However, it's hard to compare target date funds on an "apples to apples" basis and short-term performance can be misleading when evaluating strategies. Plan sponsors have to look at long-term return potential, embedded volatility, asset allocation and how these nuances interplay with real-life participant behaviors. J.P. Morgan Asset Management's Target Date Compass tool objectively maps competing fund strategies across quadrants based on portfolio composition and risk levels to give sponsors and advisors a comparative view. Regardless of how they choose to assess fund choices, plan sponsors should carefully consider the type of strategy that will best meet their particular plan's needs and goals.