Data & Research August 29, 2012

Mutual Funds Not Considered Through-Retirement Solution

The average investor thinks a mutual fund will help meet retirement goals, but is not confident it will provide an income stream.

 

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Within the 44.1% of U.S. households owning mutual funds, 94% said retirement is their primary goal for having them. In addition, 82% of those owning mutual funds said they feel very or somewhat confident in the ability of mutual funds to help them meet their retirement goals, but only 22% consider mutual funds a means of providing current income, according to the Investment Company Institute (ICI).

While relabeling existing income funds to include the phrase “strategic income” can improve investor awareness of long-term funds’ capability to provide an income stream, investors might think the fund name depicts a fixed income-oriented fund and not necessarily an equity-based fund, according to a report titled “Asset Management Industry Market Sizing 2012-2017,” from Financial Research Corp. (FRC), a Division of Strategic Insight.

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To combat this thinking, the fund industry must improve education and awareness for advisers and investors about how funds can complement existing income strategies through dividend-paying options, Amy LaFrance, senior research analyst at FRC and author of the report, told PLANADVISER. This is especially important if the goal of fund providers is to retain assets through retirement, she said.

“As the search for income intensifies, fund providers must educate investors and advisers about the role mutual funds can play in income planning,” LaFrance said. “Fund providers must be willing to demonstrate how adding income funds into an overall portfolio can deliver a stabilizing effect—especially during the draw-down periods. In turn, advisers must relay this to their clients, either through hypothetical reports or additional client-approved material from fund providers.”

Compared with the return on stable value funds today, equity income funds can often generate greater income potential, and their inclusion in employer-sponsored platforms can help mitigate the impact of negatively sequenced returns, LaFrance said. As fixed income becomes increasingly more difficult to navigate over the next several years, plan advisers and sponsors may find that equity income mutual funds prove to be a suitable complementary alternative, she added.     

“[Mutual funds are] not meant to provide the entire source of income, but they certainly can complement existing income streams,” LaFrance said.   

To learn how you can get access to this study, call 617-399-5629 or e-mail kathy.marshall@frcnet.com.

Data & Research August 29, 2012

Survey Suggests No Expected Uproar About Fee Disclosures

One in five defined contribution (DC) participants surveyed by LIMRA said they rarely or never read retirement plan disclosures.
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The rest claimed to read disclosures at least some of the time, but the majority reported they are only skimming them or trying to see if they reveal something “important.”      

The most common reasons plan participants do not read disclosures are that they are too long, and that they are too technical or complicated, and hard to understand. Forty percent said they did not read disclosures because they would not change anything, anyway.     

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Reaction to fee disclosures could be muted in part because participants are not sure how to use the information. One in three plan participants reported they did not know what they would do if they discovered they pay higher-than-average fees. Nearly one- quarter (24%) said they would move their current assets into funds with lower fees, and one in five (21%) said they would speak to their employer about the fees they pay.     

Younger plan participants (ages 18 to 35) are more likely to report reading disclosures; this group is also more likely to reach out to their employer for information about their retirement account than older participants.

 

(Cont...)

Half of DC plan participants do not know how much they pay in annual fees and expenses, the survey found. Women and those with household assets under $100,000 are more likely to be unaware of how much they pay in fees and expenses each year.    

Many will be surprised with the information in the new disclosures—almost four in 10 (38%) said they did not pay any fees or expenses. Those who do not believe they pay any fees or expenses tend to have less in household assets and are less likely to have graduated college.   

Of the 12% who said they were able to estimate their fees, the most common estimate was less than 1% of the account balance (44%).Nearly three-quarters (74%) of those who estimated their plan fees believed that they were reasonable.     

Most consumers (62%) do not know how the fees charged within DC plans compare with those charged in individual retirement accounts (IRAs). Even among participants that are very or somewhat knowledgeable about investments and financial products, four in 10 do not know how DC and IRA fees compare.  

In May, LIMRA surveyed U.S. adults ages 18 to 84 who are involved in household financial decisions and currently work for pay, are retired or recently unemployed (i.e., have worked for pay in the past 12 months). Of 5,296 consumers, 974 defined contribution participants were randomly selected to answer questions about DC plan fee disclosure.

 

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