Data and Research June 19, 2019

TIAA Institute Links TDFs to Positive Retirement Investment Behavior

The think tank releases a study report about the relationship between participant behavioral changes and default investment funds.

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The TIAA Institute has released a report discussing how participant contribution decisions have changed since the enactment of the Pension Protection Act of 2006 (PPA) enabled the use of target-date funds (TDFs) as a plan default investment.

Prior to TDFs, money market funds were the most common default investment option. With this in mind, the study asked three questions: “First, how do the changes in default investments and available numbers of funds in the plan menu affect the number of funds used by participants? Second, what determines whether participants use target-date funds? Finally, how do these regulatory and plan changes affect the percentages of equity in allocations?” 

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The study found that participants who join a plan with a TDF default contribute to fewer funds and are significantly more likely to choose only TDFs for their allocations. Additionally, it says, participants will, on average, contribute to funds with greater equity exposure, and there is “less cross-sectional variation in contribution equity exposure across participants; both equity exposure effects are significant across age groups and gender.”

“While it is not surprising that a target date default leads to more concentrated contributions with less variation across investors, it is not obvious that this should change equity exposure,” the study says. “Before the adoption of a target-date default, investors could have selected any amount of equity exposure. After target-date defaults, investors who selected the default could also have selected additional funds to alter the equity exposure of their overall allocations. The fact that the default altered average equity exposure suggests a strong behavioral effect associated with the design and default designation of target-date funds.”

The study was conducted with a cross-section of 600,000 TIAA participants, who were divided into three groups: 1) participants who joined their current combination of plans—i.e., their employer’s primary plan plus at least one supplementary plan—before any of those plans had a target-date fund default; 2) participants who joined after some, but not all, of their plans had a target-date fund default; and 3) participants who joined after all of their combination of plans had a target-date fund default.

Participants who joined their company plan after a target-date fund was made the default were significantly more apt to invest in the TDF only. As a result, TDF-only participants tend to hold substantially more types of mutual funds. This is because TDFs contain a number of underlying mutual funds, the study reports.

The study concludes by noting that TDFs offer an effective solution for plan sponsors and participants, but they do not account for differences in income, wealth, risk aversion and life expectancy. Additionally, while the higher equity exposure linked to TDF defaults can lead to higher expected returns, it is also associated with greater portfolio volatility.

More information on the TIAA Institute’s study can be found here.

Data and Research June 19, 2019

Aegon Ties Health to Wealth in Retirement Planning

As individuals are living well past the traditional retirement age, Aegon releases a study highlighting the importance of an employee’s health and how health is discussed in the workplace.

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Touching on the role of longevity in retirement planning, a recent Aegon study emphasizes how health plays a daily role when planning for the future, and sometimes, is even more important than wealth.

The Aegon Retirement Readiness Survey 2019 relates health with retirement readiness through the Aegon Retirement Readiness Index (ARRI), a score that ranks the level of readiness employees feel as they near retirement. Workers who believed they are in good or excellent health achieved a higher score than those who said they are in fair or poor health, at 6 for those in “Good” shape and a 7.1 for those in “Excellent” shape, while those who indicated they are in “Fair” health reached a 5.5 ranking, and those who concluded their health as “Poor” scored a 5.1 ranking. Each high index score was rated on a scale between 0 to 10.

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Additionally, the study finds the healthier a worker is, the more positive their attitude will be when it comes to retirement. Those who stated they have “Good” or “Excellent” health had significantly higher scores than those in “Poor” or “Fair” shape.  

While Aegon does disclose how several factors can influence both health and retirement readiness, including age, sex and income, results show positive correlations between the two.

The white paper stresses the importance of healthy lifestyles during an employee’s working life, citing the benefits employers reap from a healthy work force. Because it can be difficult for sedentary and inactive individuals to achieve long-term behavioral changes when it comes to adopting a new diet or exercise regime, the study suggests plan sponsors incorporate smaller changes and benefits to encourage workers on making conscious healthy choices, such as sit-to-stand desks, and healthy challenges with colleagues, noting that a workplace’s social environment could encourage healthy behavior.

More information on the study can be found here.

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