Data & Research June 7, 2009

Participants May Be Overconfident About Their Investments

Most participants are pretty confident about their investment diversification—but a new survey suggests that confidence may be misplaced.
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A national survey by Wells Fargo & Company’s employee benefits consulting group, Bryan, Pendleton, Swats & McAllister, LLC (BPS&M) indicates that four out of five participants (80%) believe their investments are well-diversified, but Wells Fargo’s analysis of the actual investments of 401(k) participants shows that only about half that level (42%) actually meet a minimum level of diversification. Of course, that confidence may be a bit dented at the moment – the survey was conducted last August.

As for how participants evaluate that performance, the survey’s authors say that the most common selection for how participants evaluate their investment performance: “If I make money, it’s good. If I lose money, it’s bad.”

The 2008 Individual Retirement Planning Behaviors and Attitudes Survey from BPS&M focuses on the three behaviors required to prepare for retirement: plan participation, adequate contributions, and investment diversification.

Participation Drivers


Survey respondents say participation in a plan is often driven by feeling the need to save in order to retire comfortably, followed by matching contributions and tax advantages. The most common reason employees don’t participate: they cannot afford to have more money come out of their paycheck (only 12% of respondents had household incomes greater than $100,000).

Most participants surveyed view automatic enrollment positively, with 60% agreeing that employers have a responsibility to automatically enroll employees in the retirement plan.

Most respondents understand the need to save, but they want and need more education from employers on how to determine an appropriate savings rate. In fact, a third of employees wouldn’t even venture a guess about how much they need to save each year to have enough income during retirement. Of those who did, many employees had high estimates of how much they need to save each year to have a comfortable retirement, with the mean estimate being 19% of their income saved annually, through both their own contributions and those of their employer.

Most say they would sign up for a program that automatically increases their contribution rate a little bit each year, though the actual adoption rate for such programs has traditionally tracked well below that level of acceptance.

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Survey results can be obtained by contacting BPS&M at 615-665-5335 or BPSMsurvey@wellsfargo.com.

IMHO June 7, 2009

IMHO: "View" Points

We hadn’t gotten very far into the agenda of our Plan Designs conference last week when a plan sponsor asked the question that, IMHO, is on a lot of people’s minds these days.
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And while I don’t remember her exact words, the essence was this: “What can you say to participants who no longer trust their 401(k)?”
As we explored the question, we learned that her firm matched dollar-for-dollar up to 5%—a VERY generous match (particularly these days)—and yet, despite that, she said she has participants who are dropping out of the 401(k)—and/or talking about dropping out of the 401(k)—with an eye toward simply investing in a bank CD (not the music kind).
Now, before you ask, yes, her plan uses a financial adviser—and, yes, that financial adviser and her provider, and, so far as I could tell, she had worked hard to communicate all the “proper” messages. Her plan participants had been reminded about market cycles, reassured about the ability to get a “bargain” with their new contributions, comforted with the message to “stay the course,” and, yes—buttressed with a reminder about the buffer of the company match. All of which are, of course, legitimate points—and which, by the way, this plan sponsor heard again from those on the panel and those in the audience.
There were also a few “easy” off-line answers to her dilemma: If you can’t trust the adviser, get another one; if you’re not happy with the fund offerings your provider has put forth, change them (or change the provider). “Solutions” that, to my ears anyway, were more or less a “shoot the messenger” approach. Besides, so far as I could ascertain, that wasn’t really the problem here.
The problem—and one that wasn’t addressed, IMHO—is the question that has to be answered before a participant (or plan sponsor) can draw comfort from any of those rationalizations: How can I trust YOU to be telling me the truth? More to the point, why should I believe you?
And, as I listened to the various attempts of the panel (and the audience) to assuage this plan sponsor’s concerns, I was struck by how truly “pat” they all sounded—and, to someone who wasn’t prepared to just blindly suspend disbelief, how hollow. One well-intentioned adviser, after the session and, to his credit, in private, said, “After the markets come back, the trust will, too.”
I’m not so sure.
Like many, perhaps most, in that auditorium, I remain confident that, left to their own devices, the markets and economy will rebound (and that, not left alone, they will still rebound, but at a slower pace). That said, the voices of reassurance in the auditorium didn’t really seem to “get” the concerns expressed—and, to my ears, anyway—there was even a hint of condescension.
Reading between the lines of the question, I felt that I wasn’t just hearing a participant question being relayed. Indeed, at a time when much of what we have taken for granted has instead been “taken” from us (and, like it or not, that’s how it feels to many), I think many plan sponsors are also revisiting their trust; trust they have long had in reasonable (and disclosed) fees for services rendered, in sensible asset allocation models, in the ostensibly unbiased counsel provided to them by those they hire….
In the days since, as I’ve thought back to that session, I was reminded that human beings are willing to listen to people they trust—friends, family, co-workers—for counsel on their approach to many things, but you rarely trust someone, for long anyway, who doesn’t seem to understand—and appreciate—YOUR point of view.

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