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Retirement Ready? Get Ahead of the Curve with Target Date Index Portfolios

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"While fiduciary responsibilities will always be top of mind, their [plan sponsors'] needs are becoming more complex as all parties recognize the difficulties employees are facing in saving for retirement."

—Jordan Burgess, Senior Vice President, head of Defined Contribution Investment Only (DCIO) sales at Fidelity Financial Advisor Solutions, Preparing Employees for Retirement is Growing Concern for Plan Sponsors, According to Fidelity® Survey

“Preparing employees for retirement” is job Number One goal for plan sponsors, according to Fidelity’s 5th Annual Plan Sponsor Attitudes Survey. Nearly 70% of plans sponsors declared they are considering plan design changes. This is double the number who expressed such an interest back in 2012.

What changes are plan sponsors eyeing to effectively advance retirement readiness? A November article in “Employee Benefit Views” highlights retirement plan design trends to watch for in 2015, three are detailed below:

1) Automatic Enrollment: A basic, albeit obvious, element of plan design must focus on actually getting participants IN the plan. Sound simple? Not so, according to the Department of Labor (DOL) who reports that approximately 30% of eligible workers do not participate in their employer's plan. The DOL studies further cite that implementation of automatic enrollment plans could reduce the 30% non-participation rate in most defined contribution plans to less than 15%. An Ascensus survey found that plans with automatic enrollment had 21% higher participation than plans without. So, suffice to say, those 70% of plan sponsors who are considering a plan design overhaul would do well to add an auto-enroll feature to their plans.

2) Automatic Increase or Escalate: Auto increase boosts participants’ savings rates incrementally and at certain intervals until they reach a pre-determined level. On average, employees on track for retirement save at a rate of 14% per year.  Biting that off all at once can be onerous, so auto increase helps employees incrementally increase their deferrals to avoid a big hit to their paychecks.

3) Guided Investment Solutions: Risk-based and target date portfolios provide simple one-step solutions to help participants invest easily and appropriately for retirement. They may also hold the key to helping plan sponsors lead their participants to a more secure retirement. In fact, a Cerulli study concluded that in the next five years some 90% of new contributions will go into target date portfolios.

Target date portfolios have become popular choices — and for good reason.  Instead of trying to build and maintain a proper portfolio from a long list of fund options, these single-selection options allow participants to invest in a portfolio that includes the right amount of stocks and bonds at the right time – in a portfolio managed by a professional with a proven process for managing portfolios.

Target date portfolios assume an asset allocation formula that is based on a target year for a person’s retirement. The portfolio is managed to invest aggressively for younger persons with a higher allocation to stocks and gradually become more conservative by decreasing stocks and adding more bonds as the target year draws nearer. 

From a simplicity standpoint, the merits of target date portfolios are easily recognized. In our experience with plan participants, a few commonalities emerge:

  • Plan participants have little, if any, knowledge, experience or interest in investments.
  • Even if they say they will log in, enroll and allocate percentages of funds to build a portfolio, they won’t. And, the chances are quite slim that they will check in over time to adjust their risk downward as they move closer to retirement.
  • Participants are generally distrusting of the stock market, meaning that they will either invest in a low-return guaranteed fund or stable value fund — even though they are far away from retirement, or they will jump out of stocks in a down market — resulting in an unrecoverable loss.
  • Holders of target date portfolios are overwhelmingly more willing to stick to the plan. According to Barron’s: “Holders were four times less likely to trade out of their target-date investments during the market plunge of 2008 than holders of other 401(k) investments.” (“Target Date Funds Take Over”, Barron’s, July 5, 2014)
  • Improvement can come from putting inertia to work. A large majority of participants remain in a plan’s default investment. Target date portfolios that closely match the year a participant turns 67 make an excellent default – meeting each participant where they are in their stage of investing their financial capital against the backdrop of their timeline of human capital.

Index Fund Advisors (IFA) has long focused on solving for retirement readiness – bringing plan sponsors easy-to-implement portfolio solutions, including IFA’s Target Date and Risk-based Index Portfolios. These are appropriate for ERISA and non-ERISA 401(k), 401(a), 403(b) and 457(b) plans.

IFA’s prudent investment portfolios are:

  • Globally diversified
  • Built with low-cost index funds
  • Available on virtually any open-architecture platform, including Valic, Mass Mutual, TransAmerica/Diversified, Principal, Dimensional, TIAA-CREF and others.

Find out how IFA can put you and your employees ahead of the curve for retirement readiness. Call 888-643-3133, or visit ifa.com.