You can never underestimate the irrationality of participants. Assuming that they will act in their best interests – or even act at all – can lead to bad decisions about TDFs. Based on research utilizing their 1.5 million DC participants, JP Morgan is trying to determine how to best design plans and TDFs. Key findings include:
• Don’t assume that participants will start deferring at 6% and end up at 10%. In auto-enrolled plans, the average deferral rate is 4%, compared with 7.7% in non-auto-enrolled plans.
• 83% of participants withdraw their money within three years of retirement, which makes the argument for “to” versus “through” TDFs as well as a more conservative approach near the end of the cycle. (But see “Arnott: More Aggressive Allocation Closer to Retirement Yields 20% Greater Return.”)
• Not all TDFs are created equal, so comparing them is essential. JP Morgan has a tool for this, as do other providers like Pimco and Allianz.
