Data & Research June 5, 2018

TDF Investor Behavior Improves, But Allocation Mistakes Remain Common

Looking ahead, Vanguard researchers estimate that 77% of participants on the firm’s recordkeeping platform will be invested in a single TDF by 2022.

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Vanguard reports that more than half of 401(k) participants are now invested in a single target-date fund (TDF), compared to only 13% just a decade years ago.

A new report published by Vanguard, “How America Saves 2018,” suggests target-date funds (TDFs) continue to reshape the investment patterns of retirement savers, driving increased diversification and deterring errant, emotional trading.

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Looking ahead, Vanguard researchers estimate that 77% of the participants on the firm’s recordkeeping platform will be invested in a single TDF by 2022.

As the data shared by Vanguard shows, when constructing their own retirement portfolios, about 10% of participants still tend to hold extreme allocations—defined here as holding either 0% or 100% equities in a retirement-focused portfolio.

“With the advent of TDFs, three-quarters of all participants now have broadly diversified portfolios—up from only half 10 years ago,” Vanguard’s report states. “The rate of participants holding concentrated stock positions fell by half during the same timeframe. TDFs also help investors ‘stay the course’ with their investment plans, with only 2% of TDF investors executing a trade in 2017.”

The publication of the report comes alongside something of a reinvigoration of the target-date fund research topic in the financial services trade media. As the Great Recession of 2008 and 2009 proceeds further into the rear-view mirror, providers seem increasingly concerned about investor complacency—and on the optimal way to shape their risk glide paths for TDF product users who are approaching and entering retirement. Providers in 2018 are also more prone to discuss the way workplace demographic shifts are morphing their approach to risk management and product presentation.

“Target-date funds have revolutionized investing for millions of Americans, providing a ready-made, diversified portfolio for retirement savers,” observes Martha King, managing director and head of the Vanguard Institutional Investor Group. “Many participants lack the time, willingness, and expertise to build and manage their retirement portfolios, and TDFs offer a professionally-managed investment option at a very low cost.”

According to the How America Saves report, over the past decade, plan sponsors have implemented “thoughtful plan designs to influence and improve employee retirement savings.” The dramatic rise of TDFs—and subsequent portfolio construction benefit—has been driven by the adoption of automatic enrollment, which has tripled in the last decade to nearly half of plans.

“Plans with automatic enrollment have a 92% participation rate, compared with a participation rate of just 57% for plans with voluntary enrollment—meaning more employees are saving for retirement,” the report explains. “Not only are sponsors using higher default rates, but of those plans with automatic enrollment, two-thirds have also implemented automatic annual deferral rate increases. Importantly, automatic increases have helped to narrow the spread between deferral rates for participants in voluntary plans vs. automatic enrollment plans to just 0.3 basis points.”

Vanguard’s data further shows, when both employee and employer contributions are taken into account, the average savings rate of 10.5% has held fairly steady over a 15-year period.

“More people are participating in their employer-sponsored 401(k) plan than ever before, and saving at a healthy rate of about 10%,” adds Jean Young, senior research analyst in the Vanguard Center for Investor Research and lead author of How America Saves. “After over a decade of leading this research, it’s gratifying to see meaningful advances in plan design have such a tangible, positive impact on retirement savings for participants.”

The full Vanguard analysis can be downloaded here.

Compliance June 4, 2018

Invesco Latest Target of ERISA Self-Dealing Lawsuit

In a complicated complaint filed in federal district court, participants in Invesco’s retirement plan say they have been subject to disloyal and imprudent decisions made by conflicted plan officials.

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Invesco is the latest retirement plan services provider to become the target of a self-dealing lawsuit seeking relief under the Employee Retirement Income Security Act (ERISA).

The complaint was filed in the United States District Court for the Northern District of Georgia, Atlanta Division. The suit has a laundry list of defendants from across the Invesco organization, including individual officers and managers.

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Allegations leveled in the proposed self-dealing class action challenge vary widely and include many similar to other litigation. The plan is accused of offering too many investment options—nearly all of them affiliated in some way with Invesco—and of failing to use its leverage as one of the larger employer-sponsored retirement programs in the U.S. to negotiate for reduced costs for the benefit of plan participants.

Beyond these allegations, plan officials and Invesco leaders are accused of breaching their fiduciary duties by offering imprudent affiliated exchange-traded fund (ETF) investment products to participants. Further, the lawsuit alleges that the plan offered worse-performing retail shares instead of better-performing institutional shares.

The list of allegations goes on to suggest the firm added poorly performing proprietary mutual funds to the plan; that it offered imprudent Invesco-branded target-date funds (TDFs) with high expenses and poor performance; and that the plan fiduciaries erred in connection with offering collective investment trusts. In particular, plaintiffs call out the allegedly imprudent offering of the Invesco 500 Index Trust Fund, the Invesco Mid Cap Growth Trust, and the Invesco Diversified Dividend Trust. In all, the complaint lays out six proposed counts for breaches of fiduciary duty and prohibited transactions.

Summarizing their allegations, plaintiffs suggest defendants did not consider or act in the best interest of the plan and its participants throughout the class period.

“Instead, defendants put their interests before the plan participants by treating the plan as an opportunity to promote and generate fees from proprietary investment products offered by Invesco and its subsidiaries,” they allege. “During the class period, Invesco and the other defendants used plan participants as a captive market for Invesco’s proprietary investment products to benefit Invesco. Instead of engaging in a prudent process to find the best investment options for the plan, defendants simply loaded it with Invesco proprietary investment options.”

According to the complaint, during the class period, between 93% and 95% of the plan’s investment options were affiliated with Invesco. Many of the plan’s investment options performed worse and/or had higher fees than other comparable unaffiliated investment options, the complaint alleges.

“The utter lack of a prudent process followed by defendants is also shown by the large number and type of investment options offered in the plan,” the complaint states. “Even though the typical 401(k) plan offers between 10 and 15 investments the plan had approximately 150 to 205 options during the class period. Defendants indiscriminately dumped Invesco mutual funds, ETFs, and other investment products into the plan in breach of their fiduciary duties.”

The plaintiffs seek to establish that the large number of options made their selection by plan participants confusing, especially since the plan allegedly offered multiple share classes (with different fees and performance results) of numerous funds.

“Furthermore, several investment options exposed plan participants to an undisclosed liquidity risk as a result of their investments in another proprietary Invesco fund named the Invesco Short Term Investment Fund, which was fined $10 million by the U.S. Department of Labor for inappropriately using fund assets to artificially inflate the net asset value of that fund,” the complaint states. “Defendants acted in their own interests to the detriment of plan participants. Instead of carefully examining and selecting the most prudent investment options for the plan or prudently monitoring the plan to eliminate its poor investment options, defendants caused the plan to offer almost exclusively Invesco affiliated mutual funds, collective trusts, and ETFs enabling Invesco and its subsidiaries to earn lucrative fees and to increase its assets under management.”

To remedy these alleged fiduciary breaches and prohibited transactions, the lawsuit seeks to recover “all losses resulting from defendants’ breaches of fiduciary duty and other ERISA violations and restore to the plan any profits made by the fiduciaries or the persons and/or entities who knowingly participated in the fiduciaries’ imprudent and disloyal use of plan assets.”

Invesco declined to offer comment on the filing of the lawsuit, noting that it does not speak about ongoing litigation. The full text of the lawsuit is available here.

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