Employers Not Confident in Employee Retirement Readiness

Despite efforts to improve defined contribution (DC) plan participation and savings, employers lack confidence in the retirement readiness of their employees.

The Towers Watson survey of 371 U.S. employers that offer a 401(k) plan as their primary DC retirement plan revealed only one in five respondents (22%) believe employees generally make informed decisions about their retirement savings, and only 26% believe their employees have realistic expectations about what DC plans can provide. Nearly one-half of respondents (48%) expect a greater number of older workers will ultimately delay retirement.   

This lack of confidence is despite the fact that employers have made successful efforts to increase employee participation and deferral rates. More than half of respondents (56%) reported employee participation levels at or above 80% this year, compared with 50% two years ago. The higher participation rates are primarily the result of employers using automatic enrollment, with nearly two in three respondents (65%) now using this feature, compared with 51% in 2009.   

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To encourage adequate participant savings rates, 71% of those that use automatic enrollment also use auto escalation, which allows a gradual increase in contribution levels over a certain period of time. Employers are also becoming more transparent about fees, with more companies now charging participants direct, equal-dollar recordkeeping fees. One-third of respondents now pay recordkeeping fees through revenue sharing, which represents a decline from 42% in 2009.

The survey also found the average number of investment options offered in a DC plan is decreasing. The number of employers offering 20 or more options declined from 32% in 2010 to 24% this year. Nearly seven in 10 (69%) respondents offer between 10 and 19 investment options. Nearly one-half of respondents now offer a brokerage window as an option.  

 

The use of lifetime income distribution options (i.e., annuities) is low. Only 6% of respondents offer a lifetime income distribution option; of this group, 82% report that less than 5% of participants elect the annuity option. Forty-five percent offer the option only at the time of retirement, and the plan is responsible for providing the lifetime income distribution.  

While nearly three-fourths of respondents (74%) said the most prevalent reason for offering a DC plan is to provide their employees with an adequate retirement at a reasonable age, more than half of the respondents cited benefit competitiveness, benefit plan cost, and attraction and retention as the top three issues driving plan design.  

The survey report can be found at http://towerswatson.com/research/8056.

 

Local Religions Affect Mutual Fund Decisions

Religious denomination may have an impact on investments, according to researchers.

A study from University of Georgia and Southern Methodist University found the dominant local religion—whether Protestant or Catholic—significantly affects mutual fund behaviors.

Mutual funds headquartered in heavily Catholic areas tend to take on more risks, while those in heavily Protestant areas take on less, said lead author Tao Shu, assistant professor of banking and finance in UGA’s Terry College of Business. The paper’s co-authors are Eric Yeung of the Terry College and Johan Sulaeman of Southern Methodist University.

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Evidence that the religious belief of a local culture can affect mutual funds’ risk-taking decisions is unexpected, because this is a very competitive industry, Shu said. “But surprisingly, a local culture’s religious beliefs still impact risk-taking decisions,” he said.

Because mutual funds make up about half of all institutional investments in the country, the findings have widespread implications for how investors manage their money, Shu noted.

According to Shu, it has been widely documented in surveys that Catholics are more tolerant than the general population to speculative risk, and Protestants are less tolerant to speculative risk than general population. Note that Catholic churches tend to be tolerant of gambling, sometimes using lotteries to raise revenue for the church, Shu said, but many Protestant congregations take a sterner stance.

Local religious beliefs can affect mutual fund behaviors in several ways. For example, local religious beliefs can affect a fund manager’s personal beliefs and, in turn, mutual fund behaviors, Shu said.

“Additionally, people tend to choose a place to work where the local culture is consistent with their personal beliefs,” Shu said. “So it’s possible that Protestant and Catholic fund managers self-select. Also, people like to invest in local stocks, so it’s possible they will invest in local mutual funds. In this case, for example, local Catholic investors may prefer a higher-risk strategy and pressure managers into making those kinds of decisions.”

Yet, despite the risk-preference differences, the end results are about the same. The risk-taking associated with local religious beliefs does not lead to superior fund returns. The lesson for investors, then, is to ask riskier fund managers to play it safe.

“When there is risky behavior and no extra reward, it means there is too much risk,” Shu said.

 

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