Plan sponsors’ use of target funds jumps
Employers persuaded their employees to put their 401(k) investments in the stock market, but now they are trying to persuade them not to abandon their investments.
Employers spent years persuading their employees to put their 401(k) investments in the stock market and now that the market dropped, they are trying to persuade them not to abandon their investments, a new study showed.
Greenwich Associates’ “U.S. Defined Contribution Pension Plan Research Study” showed that in 2008, employers embraced target date funds that entailed investment in riskier assets for younger workers. As a result, a large number of employees took on exposure to equities on the eve of a huge market collapse, the report showed.
“It’s like a bad Greek tragedy,” Chris McNickle, a consultant with Greenwich Associates of Stamford, Conn., said in a statement.
From 2007 to 2008, the share of plan sponsors using money market or stable-value funds as their default investment option dropped to 19%, from 35%, while the share of plans using target date funds as their default jumped from 35% to 53%.
It is not uncommon for these funds’ equity exposures to reach 50% or higher, depending on the age of the investor.
Plan sponsors are using a number of strategies to persuade employees to stay invested, according to the study, including communicating that they are sticking with their own current investment policies, and that they are confident about the choices offered by the plan.
Other helpful strategies include the continued education of employees about market events and explaining that this financial crisis is severe and rare from a historic perspective, Greenwich analysts said.
Greenwich conducted interviews with 497 U.S. corporations, each with more than $250 million in retirement assets, from July through October.
Learn more about reprints and licensing for this article.
