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Publications (4)0 Total impact

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    Jodi L. DiCenzo
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    ABSTRACT: Despite their growing popularity, there is relatively little research that delves into how retirement plan participants are using target-date funds. The funds were designed to offer one-step investing for retirement: All investors need to do is select a retirement date and their retirement assets will be professionally managed, becoming more conservative as the target-date nears and continuing to gradually allocate more of the portfolio to fixed-income investments throughout retirement. However, early anecdotal evidence suggested that participants were investing in target-date funds as well as other funds - sometimes even multiple retirement date funds. This study of participant behavior in a sample of retirement plans recordkept by T. Rowe Price examines who is investing in target-date funds and how these participants are using the funds - comparing behavior in automatic enrollment plans to that in opt-in plans (plans that require employees to take action to enroll). The findings are as follows: • Participant usage of the funds is high in both automatic enrollment and opt-in plans. Over half of all participants (in plans that offer them) hold target-date funds. Automatically enrolled participants are much more likely to invest in them, and they tend to migrate to other investment options over time. • There is a negative relationship between the number of other funds offered and the likelihood of target-date fund use. • The longer target-date funds have been offered by a plan, the more likely participants (even new participants) are to invest in them. • Relative to other participants, target-date fund investors tend to be younger, shorter-tenured, and lower-income employees. They also have a lower household income. • A very high percentage of participants in plans recordkept by T. Rowe Price are investing in target-date funds exactly as they were designed to be used: Over 80% of target-date fund investors are allocating 100% of their contributions exclusively to one target-date fund. • In every age group, target-date fund investors have higher average equity allocations than their counterparts, with the gap approaching 20 percentage points for the 26 to 35 age group (87% versus 68%). The gap narrows to nine percentage points (64% versus 56%) for the 56 to 65 age group. • Finally, the use of target-date funds eliminates (when they are the sole investment) or reduces (when they are used along with other investments) extreme allocations to equities. The study finds that in every age group, a high percentage of participants who do not invest in target-date funds have either none or more than 90% of their retirement assets allocated to equities. The primary implications of this research include the following: Early arguments against target-date funds due to widespread participant misuse are no longer well founded, based on this analysis of the behaviors of the participants of T. Rowe Price’s clients. However, there is still room for improvement. Automatically enrolled participants whose contributions are defaulted into target-date funds are much more likely to use them than participants in opt-in plans. To the extent that plan sponsors believe target-date funds establish a more appropriate risk-adjusted approach toward helping participants achieve their retirement goals, they may wish to consider automatically defaulting participant contributions into age-appropriate target-date funds. However, over time many of these automatically enrolled participants migrate to other investments. Therefore, plan sponsors will want to continue to monitor participants’ decision making. This may identify future education and communication needs to help overcome any observed suboptimal behaviors.
    04/2009;
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    Jodi L. DiCenzo, Christine S. Fahlund
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    ABSTRACT: Fourth-quarter 2008 market activity may serve as a painful reminder of the impact that portfolio volatility can have on investors' retirement security.In this study, T. Rowe Price analyzes the potential impact of individual stock volatility on retirement income, finding that investing in company stock may reduce an individual's projected retirement income from investments by 60%. In the example provided, a participant's annual retirement income from investments may decline from nearly $13,500 to $5,500 if the stock portion of a balanced portfolio was invested in a single stock instead of a well-diversified portfolio of large-cap stocks. Plan sponsors may wish to consider the potential negative impact of individual stock volatility on retirement income as they evaluate possible revisions to their plans, as well as future retirement plan education and communication efforts.
    03/2009;
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    Jodi DiCenzo, Paul Fronstin
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    ABSTRACT: Employment-based health and retirement benefit programs have followed a similar path of evolution. The relative decision-making roles of the employer and the worker have shifted from the employer to the worker, and workers are more responsible than perhaps they ever have been for their well being--both in terms of their health in general and their financial security during retirement. This shift has been supported, in part, by legislation--namely ERISA, the HMO Act of 1973, the Revenue Act of 1978, and most recently, the Pension Protection Act. This Issue Brief does not pass judgment on this development or address who should bear the responsibilities of preparing workers for retirement or of rationing health care services. The current trend in health care design is toward increased "consumerism." Consumer-driven health is based on the assumption that the combination of greater cost sharing (by workers) and better information about the cost and quality of health care will engage workers to become better health care decision makers. It is hoped that workers will seek important, necessary, high-quality, cost-effective care and services, and become less likely to engage providers and services that are unnecessary and ineffective from either a quality or cost perspective. As employers look ahead toward continually improved plan design, there may be benefits in considering the lessons learned from studying worker behaviors. Specifically, there is evidence about the effects of choice, financial incentives, and information on worker decision making. As a result of research in this area, many retirement plan sponsors have moved toward plan designs and programs that recognize the benefits of well-designed defaults, simplified choices, required active decision making, framing, and commitment to future improvements. With respect to choice, it is now known that more is not always better and may even be worse in some cases. Just as fewer shoppers actually bought a jar of jelly when it was one of 24 as opposed to one of six, evidence has shown that people tend to be less likely to join a company-sponsored retirement plan when more investment options are offered. More choice can also lead to lower satisfaction. It is also known that workers may not be able to appropriately sort through many complex alternatives and that education is not always as effective as employers would hope. Decision complexity often forces people to find a way to simplify, and one of the easiest rules of thumb is to pick the option with the lowest short-term cost, even when that alternative is more costly in the longer run. It is also known that, for good or for bad, choices are constructed on the fly; preferences are dynamic, and logic does not always apply. Financial incentives are helpful in motivating behavior, but they do not affect everyone's decisions. Despite significant financial incentives to participate in 401(k) plans, many workers choose not to. Similarly, despite many of the financial incentives embedded in health care plan design, it can be expected that these incentives will not effectively motivate and engage all workers. One seemingly rational approach to improve workers' decision making is to provide education and guidance to help them sort through complex alternatives and to demonstrate the value of financial incentives. Certainly, providing education and guidance in the form of decision support tools may be an employer's responsibility. However, some studies have shown that, even when "educated" workers have the intent to make improved decisions, they often lack follow-through and fail to take action. In short, education and guidance may not be enough to foster improved health care consumerism. Some employers have begun to design benefit programs with a view toward overcoming behavioral tendencies that negatively affect workers' well-being. Newer retirement plan designs involve careful consideration of default choices. These defaults apply unless workers actively choose a different alternative. Typically, the default attempts to "nudge" workers toward optimal behavior. In the case of 401(k) retirement plan design, more employers are moving toward a default of automatic enrollment in the plan, with automatic investment in a diversified portfolio. Still, additional empirical research and experimentation may be needed to further understand the effects of new retirement plan design features. Future work may also precisely illuminate how the lessons discussed in this Issue Brief may apply to health care plan design that results in improved health-related behaviors. Given the impressive preliminary results in improving retirement planning behaviors, such research and experimentation are likely to be worthwhile.
    EBRI issue brief / Employee Benefit Research Institute 09/2008;
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    Jodi DiCenzo
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    ABSTRACT: Behavioral research has made important, relevant contributions to retirement saving and investing. This work has cast a new light on participant behavior and its underpinnings: By and large, individuals are inert--with good intentions, poor follow-through, and bounded rationality. Loss aversion and decision-making biases often lead to unfortunate outcomes, including a poorly funded retirement. Further, behavioral economists have demonstrated that education and communication programs alone may not be effective in changing behavior. Instead, with their behavioral insights, they have offered new retirement plan design alternatives and empirically tested their efficacy in overcoming identified suboptimal behavior. These efforts are helping to pave a path of least resistance that should lead to greater retirement security. The Pension Protection Act of 2006 appears to support these alternatives by providing incentives to plan sponsors that implement automatic features such as automatic enrollment and deferral rate escalation. It also allows plan sponsors to choose more aggressive investment defaults. Perhaps implicit in this support is some advice to sponsors to accept participant behavior and to think more about changing their own by embracing automatic plan features.
    EBRI issue brief / Employee Benefit Research Institute 02/2007;