Trendspotting

Lower Fees

Fund fees in 401(k) plans continue to decline

The expenses 401(k) plan participants incurred for investing in long-term mutual funds declined in 2012, the Investment Company Institute (ICI) found.

According to its report “The Economics of Providing 401(k) Plans: Services, Fees and Expenses, 2012,” the decrease in expenses for these funds, which include equity, bond and hybrid funds, is consistent with the downward trend of the past decade and a half.

Findings from the report indicate plan participants who have mutual funds tend to invest in lower-cost funds. In 2012, the average expense ratio on equity funds offered for sale in the United States was 1.40%. The 401(k) plan participants who invested in equity mutual funds paid less than half that amount (0.63%). Expenses paid by investors were also lower than the asset-weighted average expenses for all equity fund investors (0.77%).

Over the past 15 years, the costs 401(k) plan participants have incurred for investing in long-term mutual funds have trended down, according to the report. In 1998, 401(k) plan participants incurred expenses of 0.74% of the 401(k) assets they held in equity funds. By 2012, that figure had fallen to 0.63%, a 15% decline. The expenses 401(k) plan participants incurred for investing in hybrid and bond funds have fallen even more— 19% and 23%, respectively, from 1998 to 2012.

In line with the trend in recent years, the report found that the average expense ratio that 401(k) plan participants incurred for investing in equity funds declined from 0.65% in 2011 to 0.63% in 2012. Similarly, expense ratios that 401(k) plan participants paid for investing in hybrid funds fell from 0.61% in 2011 to 0.59% in 2012. The average expense ratio 401(k) plan participants incurred for investing in bond mutual funds dropped from 0.52% in 2011 to 0.50% in 2012.

More than half of the $3.6 trillion invested in 401(k) plans at year-end 2012—$2.1 trillion—was invested in mutual funds. Of that $2.1 trillion, 55% was in equity funds, 26% in hybrid funds, 15% in bond funds and 5% in money market funds.

“Our research bears out the fact that 401(k) plan participants investing in mutual funds tend to hold lower-cost funds,” says Sean Collins, senior director of industry and financial analysis at ICI in Washington, D.C. “As our report notes, this provides a market incentive for funds to offer their services at competitive prices. In addition, employers, as 401(k) plan sponsors, consider a range of factors when selecting investment options for the 401(k) plan, including performance, services, funds’ investment objectives and, importantly, cost.”  —Kevin McGuinness

Confidence Gap

The great divide between early and late Boomers

Different workplace experiences and employee benefit histories are causing a divide between early and late Baby Boomers regarding their financial security and outlook on retirement.

A report released by the Insured Retirement Institute (IRI), “The Great Divide: Financial Comparison of Early and Late Boomers’ Retirement Preparedness,” shows those on the tail end of the Boomer category will be confronted with added challenges and are less prepared financially to overcome them.

The report found that, while the percentage of all Boomers who are confident they have sufficient funds to cover their retirement years sank to 34% this year, results varied within the broader group. Early Boomers, ages 61 to 66, were slightly more optimistic, with 42% believing they have enough savings to live comfortably throughout retirement. But for late Boomers, ages 50 to 55, only 25% shared this confidence.

Other findings from the report include the following:

• While savings are lagging for both groups, 47% of late Boomers reported having less than $100,000 saved for retirement, compared with 32% of early Boomers;
• Forty-three percent of late Boomers identified a defined contribution (DC) plan as a major source of retirement income, compared with 36% of early Boomers;
• Insufficient savings is the most common reason late Boomers are uncertain of when they will retire, stated by 27% of those surveyed. By contrast, the most common reason for the uncertainty among early Boomers, cited by 20%, is that they enjoy working;
• Of late Boomers, 31% are struggling to pay their rent or mortgage, and 34% are financially supporting an adult child, compared with 20% and 21%, respectively, of early Boomers; and
• Most late Boomers (80%) remain in the labor force, compared with only 43% of early Boomers.

“From a retirement planning perspective, we need to start segmenting the Boomer cohort to ensure that we are appropriately addressing their unique retirement needs and challenges,” says Cathy Weatherford, IRI president and CEO, based in Washington, D.C. “Those on the back end of the generation have had a much different workplace experience than the first Boomers. They worked most of their careers during the defined contribution plan era and will face many of the risks and challenges that have come with it.”

Weatherford expects that, as a result, late Boomers will take more responsibility for their own retirement income security. At the same time, however, they have less saved for retirement, and their low confidence regarding their future financial security reflects this.

On behalf of IRI, Woelfel Research Inc. surveyed individuals who are approaching retirement or who retired recently. Telephone interviews were conducted with 802 Americans, ages 50 to 66. —Kevin McGuinness

Ignoring Fees

The fee disclosure regulation doesn’t phase participants

According to a client survey of 416 plan sponsors conducted by BMO Retirement Services, 80% of employers reported that the new rules mandating full disclosure of retirement plan fees and expenses have had little or no impact on their plan participants.

Plan sponsors believe the added regulations did not change participants’ behavior or their perception of their retirement savings benefit. Only 1% of plan sponsors who participated in the survey reported seeing positive or negative changes in participant behavior. Similarly, just 1% of respondents felt an increase in ill will by participants toward either the sponsors themselves or the plan’s recordkeeper.

In addition, most plan sponsors believe the increased disclosure has not added to participant confusion. According to the survey, only 15% of plan sponsors see this disclosure as confusing to their participants. In contrast, 46% expressed this concern shortly after last year’s regulatory changes took effect.

When asked when they expect older plan participants to retire, more than one-third (36%) of those surveyed believe Baby Boomers who are enrolled in their company retirement plans will work past age 65. Forty-one percent expect this will have a positive impact on their companies, compared with only 4% who felt the impact would be negative.

The survey also identified key attributes plan sponsors look for when considering adding a retirement solution to their company’s defined contribution (DC) plan. Three-quarters (74%) of plan sponsors want solutions that are easy for their plan participants to understand, and more than one-quarter (26%) want solutions that are not too complex to manage as a plan sponsor. —Rebecca Moore

Plugging Leakage

Loans result in lower savings rates

An analysis from New York Life found that the average contribution rate for participants who have taken loans from their 401(k) plans is 5.63%, compared with 7.23% for participants without loans.

According to Rachel Rice, managing director of marketing and product development at New York Life Retirement Plan Services, what this shows is that, when people have a loan, they are less likely to contribute to their plans. This is not correlated with income, Rice says. Lower-income participants are not more likely to take loans, she says. In fact, middle-income participants who earn between $50,0000 and $70,000 are more likely to have a loan outstanding, she says.

New York Life is hoping the data will lead plan sponsors to reduce the number of loans a participant may take to one or none. “Some participants, especially if allowed more than one loan, use their 401(k) plan like an ATM,” she contends, “and we want participants to see their plans as long-term savings vehicles.”

New York Life also hopes plan sponsors will begin allowing loan continuation. Rice notes that most participants with an outstanding loan who leave an employer do not have the money right then to pay the loan back. If they were allowed to pay it back even if no longer employed, they could rebuild retirement savings. “It may also result in participants not taking a cash distribution of their balance,” she says.

Not only do participants who take loans often stop contributing to the retirement plan, frequently, due to inertia, they fail to restart. Rice suggests that an auto-sweep will make sure participants get back into the plan. Participants can opt out if they prefer, but she sees that most want to be in the plan. “It is good to automatically enroll new hires, but don’t leave people behind,” Rice says. “Pick up people who dropped out for some reason, to enable them to continue saving.”

Rice believes participant loans are related to spending and saving patterns; people who take more loans are the ones more likely to have difficulty budgeting and making good spending and saving decisions. Plan sponsors can offer education about budgeting, spending and saving, and use more holistic advisory services. According to Rice, New York Life is offering more one-on-one advisory services because it believes this will help people create a plan for saving and spending, which is one of the best indicators for success.

“I really do think whatever we can do to help people save, we should. Having access to 401(k) plans is good, but leakage from those plans is a crisis, and we want plan sponsors to help employees do whatever they can to increase savings,” she says. —Rebecca Moore

Gun Shy

Participants’ allocations don’t match their risk ­tolerance

Participants have a disconnect between their portfolio allocations and their understanding of risk, according to a speaker at the (K)onvergence Summit in New York.

A survey from MFS Investment Management, outlined during a panel at the event, found 46% of respondents said they view their retirement assets as savings, not investments.

Fewer than half (44%) of Gen Y investors, who have time on their side, consider themselves aggressive investors. Even among these, however, many pick a conservative option when asked to select a hypothetical investment, MFS found.

More than half of the Gen Y investors (55%) consider 401(k) assets savings not investments—a higher number than those among Gen X investors taking this conservative view (only 42% consider their plan assets savings) and among Baby Boomers (44% of whom have this view).

Gen Y is overconfident about retirement—perhaps wrongly so, given that many maintain a conservative view of investment despite their extended savings horizon, said panelist Kristen Colvin, director of consultant relations at MFS in Boston. This generation unrealistically expects to generate a 9% return on a portfolio with 35% allocated to fixed income, she said.

All generations seem to have trouble understanding the connection between their allocations and risk, said Ryan Mullen, senior managing director at MFS in Boston. The typical participant expects to earn 8% annually, even though, on average, participants have one-third of their assets in conservative investments. They also do not see the underperformance of their assets as a major risk to their retirement.

Forty-one percent of plan participants call themselves aggressive investors, but when asked how they would invest a hypothetical sum, more than one-third (36%) express a desire to invest conservatively. At 31%, their actual allocations to conservative choices such as bond and money market funds also are higher than would be expected from truly aggressive investors.

For investors who describe themselves as conservative, 43% have no idea how their 401(k) assets are allocated, he added.

Mullen and Colvin shared several tips for helping participants understand and manage risk, including diversifying and simplifying plan design. They also suggested providing employees with tools to help them understand what they are investing in. Plan sponsors should use terms participants can understand—for example: growth, income, inflation and liquidity—to simplify the core menu. “The point is thinking about communicating investment lineups to participants in ways that they can understand,” Colvin said. —Corie Russell

Empowering Employees

Sponsors are embracing retirement readiness

Employers can do many things to empower their employees for financial wellness and retirement readiness, according to a new report from Bank of America Merrill Lynch.

The “2013 Workplace Benefits Report” found more needs to be done to help employees confidently transition into retirement. One out of four preretirees who indicate being within five years of retirement expect to have less than $250,000 saved. Employees are looking to their employers for access to one-on-one advice from a financial professional.

Two-thirds (66%) of employees have increased their focus on retirement goals within the last five years. However, 85% feel they are not saving enough, and 60% believe it will be difficult to ever save enough to support their standard of living during their retirement.

The report offers several recommendations for how employers can empower their employees in the areas of financial wellness and retirement readiness.

One way is for employers to offer individualized advice and guidance, says Steve Ulian, managing director, institutional retirement and benefit services for Bank of America Merrill Lynch in Boston. “There are tools available that give general guidance, but we’ve found that the next step is to base such guidance on the participant’s own situation so as to provide [him] with recommendations for [his] specific needs,” Ulian says.

The report found that 51% of employees said the resource or tool they would most like their employer to provide, to help them obtain financial advice, was access to a one-on-one meeting with a financial professional. This was followed by online tools (46%), financial seminars relevant to their life stage and personal situation (39%) and relevant research or literature to help them make investment decisions (38%).

However, Ulian says, employers should not overly rely on technology as a delivery system for information about financial wellness and retirement planning. “These days, it’s not necessarily about everyone using technology applications, such as websites, to participate in the retirement planning process. The days are back where people want to talk to actual retirement professionals, to sit down and really understand the material in front of them.”—Kevin McGuinness

Professional Management

Investors increasingly seek expert help

Within the next few years, more than half of 401(k) participants will be entirely invested in a professionally managed investment option, Vanguard predicts.

According to the report “How America Saves 2013,” an estimated 55% of all participants will be entirely invested in a professionally managed investment option by 2017. Vanguard found that, in 2012, 36% of all participants in its 401(k) retirement plans invested their plan assets in such an option. The total number of participants invested in a professionally managed allocation has more than doubled, from 17% at year-end 2007.

Vanguard also found that 27% of all participants in 2012 were invested in a single target-date fund (TDF), 6% held a single traditional balanced fund, and 3% used a managed account advisory program. Furthermore, 14% of participants who were offered an investment advice service through their plan adopted one.

“The number of participants completely turning their portfolio construction over to a professional or obtaining advice from professionals is an important trend in the potential future financial security of retirees,” says Jean Young, a senior research analyst at the Vanguard Center for Retirement Research in Valley Forge, Pennsylvania, and co-author of the report. “It represents a shift in responsibility for investment decisionmaking away from participants—many of whom may be inexperienced investors—to investment and advice programs that have been vetted by employers.

The average plan account balances rose by 10% in 2012, to $86,212, reflecting the effects of both ongoing contributions and market returns.

“Some may look solely at plan account balances and underestimate the retirement readiness of Americans, saying that most of us still aren’t financially prepared for retirement,” says Steve Utkus, Vanguard Center for Retirement Research director. “But when you look at the data comprehensively, the fact remains that many Americans are doing a good job accumulating private savings to supplement Social Security in retirement.” —Kevin McGuinness