The Markets April 12, 2016

401(k) Investors’ Conservative Streak Holds in March

Slightly more trading activity occurred in March compared with April within 401(k) accounts, according to Aon Hewitt. 
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According to the Aon Hewitt 401(k) Index, March saw 401(k) investors continue to be more conservative with their retirement investments, while the quarter coming to a close continued the recent dominance of target-date funds. 

In total, 0.25% of balances traded in March, up slightly from 0.21% in February, Aon Hewitt explains, and there was one day of above-normal trading activity. The asset classes with the most inflows were fixed-income funds, while funds with the most outflows were primarily equity funds. By month’s end, 17 out of 22 trading days showed more inflows to fixed income.

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Asset classes with the most trading inflows during march included stable value funds, with $146 million in inflows, while bond funds saw $129 million inflows and money market funds netted $88 million. Asset classes with most trading outflows were large U.S. equity funds, down $146 million; company stock funds, down $127 million, small U.S. equity funds, down $37 million; and international funds, down $35 million.  

“After combining contributions, trades, and market activity in participants’ accounts, the percentage in equities rose to 64.8% at the end of March, slightly up from 64.0% at the end of February,” Aon Hewitt finds. “New contributions still favor stocks, but the contributions to equities remained flat at 66.0% at the end of March, a slight change from 65.9% at the end of February.”

Looking strictly at new contributions, target-date funds are still the clear ongoing winner, with $597 million in contributions during March, followed by large U.S. equity, with $316 million in contributions.

Taking all the trading activity together, Aon Hewitt finds a volatile start to the year. Volatility on Wall Street “created the busiest trading quarter in nearly three years for participants in defined contribution plans. As a percent of balances, 0.82% of balances traded in the first quarter of 2016—well ahead of Q4 2015’s figure of 0.36% and the highest level since Q3 2013.”

Trading activity overall in the quarter favored fixed-income instruments, “with GIC/stable value and bond funds receiving the majority of the inflows. Target-date funds and large U.S. equity funds had the largest percentage of outflows overall for the quarter.”

Data & Research April 12, 2016

Many Americans Overestimate Safe Retirement Withdrawal Rate

A study reveals that 77% of Americans older than 40 do not know how much of their retirement savings they can safely spend each year without running the risk of outliving their assets
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A 10-year comparison study by New York Life shows that while more Americans are estimating a safe withdrawal rate in retirement—23% of respondents think they can withdraw less than 5% of their retirement savings annually, up from 10% a decade ago—at least four in five Americans remain at risk.

The 2016 survey reveals that 77% of Americans older than 40 do not know how much of their retirement savings they can safely spend each year without running the risk of outliving their assets. In 2006, 90% of Americans did not know a safe withdrawal rate.

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According to the survey, more than half of Americans older than 40 (58%) surveyed overestimated this safe withdrawal rate, which many experts benchmark at 4% annually for the typical retiree. Nineteen percent of respondents admit they do not know how much to withdraw without running out of money in retirement. 

At greatest risk are the more than three in 10 respondents (31%) who believe they can spend 10% or more of their savings each year. At that rate, based on historic investment returns, retirees risk running out of money in about 11 years or less—while studies show most of them will live significantly longer than that.

“There is a tremendous risk lurking in retirement—after years of doing your best to save, there is a risk of mismanaging that nest egg in retirement and running out of money,” says Dylan Huang, head of Retirement Solutions at New York Life. “Turning your savings into income for yourself in retirement is not easy, but the first step is knowing that anything above five percent is way too high.”

Huang adds that the survey found 58% of Americans are interested in learning about how to turn their savings into retirement income for life, up from 25% 10 years ago. In addition, 64% of pre-retirees are interested in learning about how to create their own pension-like income in retirement. “Without the peace of mind that pension income provided to previous generations, pre-retirees are the first generation that needs to turn their savings into adequate income in retirement on their own. It is a positive finding that they are open to finding out how to do that,” he says.

The survey was conducted by Ipsos Public Affairs March 23 through 29, among a national sample of 810 adults age 40 and older with a household income of at least $100,000.

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