Data & Research March 11, 2014

Employees Want Help with Social Security

Employees have a high interest in getting help with selecting the right household Social Security claiming strategy.
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According to a Financial Engines study of more than 1,000 retirees and near-retirees between the ages of 55 and 70, seven in 10 near-retirees (69%) who have not yet claimed Social Security said they would be at least somewhat interested in a service provided by their employer to help them develop a household claiming strategy. Of these, 39% said they would be extremely or very interested in this type of Social Security claiming help.

The study shows people made better Social Security claiming decisions with some helpful guidance about their options. More than half of respondents (52%) who have not yet claimed Social Security were influenced to consider delaying claiming after reading a simple explanation about how benefits vary with different claiming ages. Importantly, the median age respondents planned to claim increased one year (from age 65 to age 66) after watching a short video illustration. Twenty percent of study participants say they would be willing to wait four or more years longer.

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Explaining the impact that delayed claiming has on a surviving spouse’s benefit also made 44% of those who have yet to claim Social Security consider claiming at a later date.

“Many people just assume that you claim Social Security starting the day you retire and that there is no need to consider Social Security claiming strategies,” says Financial Engines’ Chief Investment Officer Christopher Jones. “The reality is that the decision of when to claim Social Security is one of the most important decisions in retirement planning. Delaying Social Security even one or two years can make a big difference in household retirement income, and especially for the surviving spouse. There are few financial planning decisions that can have such a dramatic impact on the standard of living in retirement.”

As part of the study, Financial Engines asked people eight questions about claiming Social Security benefits. Seventy-three percent of people who are not yet receiving Social Security scored a grade of “C” or lower” on the quiz. The people with the fewest assets had the least awareness about how Social Security works. Only 5% of respondents were able to answer all eight questions correctly.

The study found that retirees and near-retirees are overconfident in their ability to make good Social Security claiming decisions. Despite the mixed performance on the quiz, three-quarters of people (77%) who have not yet claimed Social Security benefits felt confident in their ability to make a good decision.

The quiz is now available on Financial Engines’ website so anyone can test their Social Security knowledge and get more information.

Greenwald & Associates conducted the research on behalf of Financial Engines. Information for the study was gathered through a 15-minute online survey with 1,008 near-retirees and retirees between the ages of 55 and 70 who have an annual household income of at least $50,000. The survey included 374 people who have already claimed their Social Security retirement benefits (median age of 65) and 634 people who have not (median age of 59).

Data & Research March 11, 2014

Over Half of 401(k) Participants Have TDFs

A research paper shows that over half of participants with a 401(k) under Vanguard are invested in a target-date fund (TDF).
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According to “Target-Date Fund Adoption in 2013,” 55% of all participants held a position in TDFs, and TDFs accounted for one-third of total plan contributions. In addition, 86% of 401(k) and other defined contribution (DC) plans at Vanguard offer a TDF.

The growing popularity of TDFs has affected the level of risk many participants take with their plan investments, according to the paper. For instance, in 2013, 23% of “do-it-yourself” investors held portfolios at either end of the equity risk spectrum. Ten percent held no equities, thus forgoing the potential return benefits of equities, and 13% held only equities, thus overexposing themselves to the higher risk associated with equities. Those figures contrast with the much riskier behavior seen 10 years ago in 401(k) plans, when 13% of participants held no equities and 22% were entirely invested in equities.

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“Target-date funds continue to reshape investment patterns in DC plans in fundamental ways. These funds provide appropriate levels of risk as a participant ages and a remedy to the problem of extreme asset allocations,” says Jean Young, author of the report and a senior analyst with the Vanguard Center for Retirement Research in Valley Forge, Pennsylvania. “For these reasons, we expect the adoption of TDFs to continue in the coming years.”

Thirty-one percent of all Vanguard participants held a single TDF in 2013, says Young, more than double the figure from five years earlier. Among participants entering the plan for the first time, two-thirds were invested in a single TDF.

The paper also shows that about half of TDF investors at Vanguard are considered “mixed investors,” meaning they hold a TDF in combination with other investments. In 2013, 46% of all TDF investors fell in this category. Of those, about half became mixed investors as a result of plan sponsor decisions, including employer contributions in company stock or other actions. The other half of mixed investors intentionally constructed a portfolio of both target-date and non-target-date strategies. Many of these participants are pursuing what appear to be reasonable diversification strategies, though they do not fit within the “all in one” portfolio approach of TDFs.

Although many participants choose to invest in TDFs on their own, the paper reveals that a major factor influencing the rise of these funds is their use as a default investment in automatic enrollment plans, in which companies sponsoring workplace retirement plans automatically put employees into their plans and invest their accounts in TDFs. By year-end 2013, 34% of Vanguard plans—covering nearly 60% of all participants—had adopted automatic enrollment, typically for participants newly eligible to take advantage of their plan.

Regardless of whether they use automatic enrollment, the paper shows that 81% of all Vanguard plans used a target-date or balanced fund as a default investment by the end of 2013.

More information about the paper is available here.

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