Data & Research May 1, 2019

Majority of Americans Unsure of Their Retirement Future

The reason is primarily because they have not created a comprehensive, written plan, according to Fidelity.

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A full three-quarters, 75%, of Americans are only “somewhat confident” or “not confident at all” that they will be financially prepared for retirement, according to Fidelity Investments’ Retirement Mindset Study. By comparison, 62% are confident about their current financial health, and 65% say they are more confident now than they were a year ago.

Fidelity says that the reason why people are uncertain about their retirement future is primarily because they lack a plan. While many say they have thought about it, only 18% have a comprehensive, written plan for their retirement.

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Asked why they do not have a plan, 23% say they never thought about it, 22% say they do not know where to begin, and 20% say they feel like they are too far behind to make a difference.

The lack of a plan cuts across all generations, with 79% of Boomers without a written financial plan for retirement, and 87% of Millennials and 81% of Generation X saying the same.

Fidelity says the best place to start is with small steps: “We know many people feel overwhelmed by the prospect of creating a plan for retirement,” says Melissa Ridolfi, vice president of college and retirement leadership at Fidelity. “The good news is you don’t have to be a great planner or take giant leaps to get started. Whether you’re a Millennial or a Boomer, or think of yourself as a planner or not, the small steps you take today can lead to a greater sense of confidence about your retirement years. It’s never too early or too late to get started.”

Fidelity asked those who have a written plan what prompted them to form one. Thirty percent say they just decided to create one, and 25% say it was because they wanted to gain control over their finances.

Asked what financial roadblocks they feared they would face in the future, 38% say rising health care costs/long-term care costs, and 28% point to Social Security benefits. Asked what they might have to compromise on with regards to their lifestyle in retirement, the most common answer was having to downsize their home, followed by living on a fixed income, and outliving their assets.

Among those who have a plan, 49% say it makes them feel more in control, 43% suggest it makes them feel good about themselves and 30% say it makes them feel relieved. Only 10% say they are still stressed about retirement.

Fidelity’s findings are based on an online survey of 1,429 adults that Brookmark Research Services conducted in February and March.

Meanwhile, an Intuit survey echoes some of the Fidelity survey findings, with 78% of Americans feeling that prosperity is currently out of reach. At the same time, 80% foresee financial success in their future and 58% think they will achieve prosperity over time.

Seventy-eight percent are delaying personal milestones, such as purchasing a home (30%), retiring (22%), starting a family (22%) starting a business (19%) or getting married (19%). Fifty-five percent do not feel confident in their ability to manage their finances, 45% say they are living paycheck to paycheck, 44% have no savings, 36% say they are burdened with debt, and 19% say they are unable to fully support themselves.

Fifty-eight percent say the economy is preventing them from achieving a prosperous life, and 46% point to demographic factors, such as ethnicity, gender and sexual orientation.

Intuit conducted its online survey of 3,163 adults in February.

The Markets April 30, 2019

The Benefits of Simplifying DC Plan Investment Menus

Doing so could encourage more employees to participate in the plan, sources say.

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Dennis Scarpa, consultant with Fiduciary Investment Advisors, told attendees at the 2019 Plan Sponsor Council of America Annual Conference about an experiment done in 2003 in which researchers set up jars of jams in a booth in a grocery store.

The first day, they included 20 jams in the booth. Seventy percent of people entered the booth, looked at and tried the jams, but only 3% of them made a purchase. The second day, the researchers only included six jams in the booth. While only half of shoppers came into the booth, looked at and tried the jams, 80% of them made a purchase.

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“The message is don’t make things too complex or overwhelming,” Scarpa said. He added that offering “an overwhelming array of fund choices” is one of the claims in Employee Retirement Income Security Act (ERISA) lawsuits against 403(b) plans.

Renee Gallagher, vice president of institutional services at Comerica, said she’s seen a movement of plan sponsors simplifying their defined contribution (DC) plan fund lineup, but along with reviewing performance and fees when making fund choices, always at the top of their mind was increasing plan participation.

Brandon M. Diersch, group portfolio manager at Microsoft, attributes the simplification of his firm’s DC plan investment menu as one reason it has such a high participation rate, 93%, without auto enrollment. “Making it simple to invest is one reason,” he said.

According to Scarpa, when simplifying a fund menu, the sophistication of participants and the investment committee is a key driver. It will inform whether the plan should offer sophisticated asset classes or managers that will make the asset class decisions. In addition, investment menus will differ by plan size—a small plan would not have the same investment menu as a jumbo plan. Gallagher offers the example of white-labeled funds she sees plan sponsors, especially large sponsors, introducing into their lineups. The DC plan fund menu will have one large cap fund, but there are four underlying fund managers within that.

Gallagher recommends a fund lineup have between 10 and 15 options, while Scarpa said it could go up to 20. According to Gallagher, this amount will cover a plan sponsor’s fiduciary liability, diversification and asset class choice. She suggested that since fees are so important, plans should offer an index strategy for each asset class. Scarpa said for each asset class there should be an active and a passive choice, unless an active choice makes no sense when it is evaluated.

Diersch said Microsoft offers a tiered investment lineup: Tier 1 is target-date funds; Tier 2 includes core investment options from which participants may choose; and Tier 3 is a self-directed brokerage window (SDBA). All speakers agreed that SDBAs are used by very few participants and only make sense in certain plans.  Participants may request certain options, or the sponsor may have employees who are more sophisticated at investing.

Speaking about participant requests, the speakers also agreed that environmental, social and governance (ESG) investment options are still evolving and not used much by plan sponsors. Scarpa said ESG investments make more sense for companies for which its core values match those of ESG options. But, he noted that it is hard to slim down an investment menu if a plan sponsor tries to include all options that participants request.

Diersch said Microsoft realizes that ESG investing is important and has a subgroup on the investment committee looking into it. One problem is there is a gamut of definitions and strategies for ESG. “Right now we have all our ESG options in the SDBA; it’s more complicated to add them in the core investment menu,” he said.

Diersch added that plan sponsors do not have to dramatically cut down their DC plan investment choices all at once; it can be done gradually. “Look at whether an active or passive strategy is more efficient for an asset class, or look at whether one manager or multiple managers is best, and when the opportunity arises, consolidate the fund menu,” he said.

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