401(k) participants continue to demonstrate their inability to make wise investment decisions. I randomly sampled several 401(k) plans and found that average participant rate of return was 7% to 10% below the S&P 500’s 30% rate of return for 2013. Some of the individual investments in the plans sampled had 40% or greater returns for the year, yet participants still failed miserably.
The fact of the matter is – participants continue to invest too much money in stable investments and money market funds, they transfer money to last year’s top performing funds and too many rely on Target Date Funds (TDFs), which are heavily weighted towards bonds, especially in the years leading up to retirement.
Target Date Funds have been in the spotlight as they celebrated their 20th Birthday in March of this year. Cerulli Associates, Inc. estimated in a recent study that TDFs will attract 63% of 401(k) contributions, and will constitute 35% of total 401(k) assets by the year 2018. Since 2008, TDFs holdings have nearly tripled, but are they really the best option for 401(k) plan participants?
At Burke Group, we believe in a different type of TDF called “Teaching Diversification Fundamentals.” We recognize that, while it may be good to offer Target Date Funds as part of an investment lineup, it is more important to teach investment basics and diversification to plan participants so they can make educated decisions about their investments over their entire career.
Over the last year, I have helped several clients switch from Defined Benefit to Defined Contribution plans as their primary benefit plan offering for their staff. I have been on the front lines, slowly converting employees from non-savers with pension benefits that were managed for them to first time savers in charge of investing on their own. Employees in this position are terrified of picking their investments and they need a lifeline. I truly believe, under these circumstances, that Target Date Funds make savers out of employees who might otherwise pass on the opportunity to save.
However, too often, the industry does what seems suitable versus what our Fiduciary compass tells us we should do. Auto-enrolling and defaulting employees to TDFs do not fulfill our fiduciary obligations. There is a place for Target Date Funds in 401(k) plans, but only after we have provided meaningful education for employees.
As we pause to acknowledge the efforts of Wells Fargo and Barclays in March of 1994, there is definitely reason to celebrate. Before we do, let’s make sure we are “Teaching Diversification Fundamentals” in addition to offering TDFs in our plans.