Aug 1, 2017 - BARRIERS FOR SMALL BUSINESS RETIREMENT PLANS .... Issued in Canada by MFS Investment Management Canada Lim
September 2017
DC AT A GLANCE Special Edition: Target Date Funds 1.
TDFS, AGE, SALARY & TENURE – In large plans, TDFs are used more by participants who are younger, lower paid or have less tenure: 88% of participants younger than age 30 used TDFs versus 60% for those 60 and older; 77% of those who earned less than $40,000 used TDFs versus 61% of those who earned more than $100,000; and more than 80% of those with less than 5 years of job tenure used TDFs versus 58% of those with 10+ years of tenure (source: Aon).
2.
ACTIVE VS. PASSIVE – A fund’s management style can either be one of active management or passive management and the same is true for TDFs. According to a recent report, 62.9% of defined contribution plans that offered TDFs used actively managed funds and 37.1% used a TDF with a passive management style (source: Plan Sponsor Council of America).
3.
RETIREMENT PLANS ARE TOPS IN TDFS – At the end of first quarter 2017, $646 billion, or 67% of all TDF assets, were held by employer-sponsored defined contribution plans. An additional $193 billion, or 20% of TDF assets, were held in Individual Retirement Accounts (source: Investment Company Institute).
4.
HOW MANY TDFS DO YOU USE? – Some participants may need help understanding how to use TDFs. One survey showed that 62% of plan participants who were investing in TDFs were investing in more than one TDF. When asked why they were using multiple TDFs, 64% indicated they did so to reduce risk and to diversify their investments, 24% indicated it was to get the asset allocation they wanted, and 11% said it was to spread their retirement plan investments across many funds (source: pwc).
5.
TDF USE DECREASES BY AGE – Although TDFs are built for specific retirement dates, fewer 401(k) plan participants nearing retirement use TDFs. Younger participants have a greater percentage of their 401(k) account balances invested in TDFs. Those in their 20s had 46.6% of their account invested in TDFs. Participants in their 30s had 31%, participants in their 40s had 20.5%, those in their 50s had 17.5% and those in their 60s had 16.9% invested in TDFs (source: Employee Benefits Research Institute).
6.
GLIDE PATHS REMAIN (MOSTLY) THE SAME – The average strategic equity glide path in TDFs hasn’t changed much over the last five years, but midcareer investors have seen a modest increase in equity exposure (source: Morningstar).
7.
TDF COSTS DROPPING TOO – The cost of TDFs continues to go down. In 2016, the asset-weighted average expense ratio of TDFs held in 401(k) plans was .51% as compared to .67% in 2008. The asset-weighted average expense ratio of an equity fund in 2016 was .63% and .83% in 2008 (source: Investment Company Institute).
8.
AUTO-ENROLL UPS TDF USEAGE (A LOT) – Plans using automatic enrollment see a significant increase in the use of TDFs over plans that do not have an automatic enrollment feature. According to a recent study, in plans with automatic enrollment, 72% of participants used a TDF as compared with 39% of participants when the plan did not use automatic enrollment (source: Aon).
9.
ARE YOU TO OR THROUGH? – TDFs may be characterized as having a glide path structured “to retirement” (reaching its lowest equity concentration at or near the target retirement date), or having a glide path designed to continue “through retirement” into the post-retirement years. Just over half (52.5%) of plans offering TDFs indicated they use TDFs with a “through retirement” glide path, while 47.5% of plans indicate they use TDFs with a “to retirement” glide path (source: Plan Sponsor Council of America).
10. ARE YOU READY FOR …? – For some people, September represents the change of seasons from summer to fall. For others, it means the start of a new school year. And for others, it means FOOTBALL! Whether you enjoy high school, college, or professional football, it all started with Walter Camp. Known as the Father of Football, he is credited with inventing the game as it is played in the U.S. and establishing many of the rules that exist today, including the scrimmage line and the forward pass. He also established standards of fair play and helped to establish the National Collegiate Athletic Association (source: waltercamp.org).
NOT ALL PLANS USE TARGET DATE FUNDS What percentage of 401(k) plans included TDFs in their investment line-up at the end of 2015?
The answer can be found by calling your MFS representative at 1-800-343-2829.
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