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Investors Not Scared
AllianceBernstein says participants still bullish on target-dates
Target-date funds have drawn a lot of scrutiny of late, but a new survey suggests that participants still have confidence in the approach.
In fact, the research by AllianceBernstein claims that 76% of defined contribution plan participants using target-date funds think that these funds provide better performance than a mix of investments they selected on their own would.
That may serve to explain why 84% of what the study authors characterize as “Actives” (they enjoy making retirement savings and investment decisions and are confident about their retirement prospects) and 88% of so-called “Accidentals” (they do not enjoy investing, do not pay much attention to it, and are not confident in their ability to make investment decisions) said they intend to maintain or increase the amount they have invested in target-date funds over the next two years. AllianceBernstein said that Actives represented about 38% of the survey participants, while Accidentals made up the remaining 62%.
More than two-thirds of Accidentals feel unsure about investing, and only 7% feel experienced or very experienced, according to the report. As for Actives, despite their labeling, just 39% claimed that they are experienced or very experienced with regard to making investment decisions. Ironically, while target-date funds appeal to both types of investors, AllianceBernstein said that Active investors are more likely to choose them.
Twenty-nine percent of Actives “strongly agree” that target-date funds provide better performance than if they were to make their own selections, while 18% of Accidentals feel that strongly.
Still Unchanged
One thing has not changed, according to the authors of the fifth annual AllianceBernstein study: The recent market turmoil has not changed participants’ overall attitudes toward investing, and that means that most participants still do not feel equipped to make retirement investment decisions in any market—good or bad.
According to a press release, only 18% of respondents reported being confident or very confident that they will have a comfortable retirement—the lowest level reported in the five years the study has been conducted. That stands in sharp contrast to the 41% of respondents who reported being confident or very confident when asked the same question in 2007.
While target-date funds are growing in appeal, many of the survey respondents seem to misunderstand how to use them. Only about one in five (19%) of participants have put 80% to 100% of their plan assets in a target-date fund, and nearly 60% of those who do not use a target-date fund as a comprehensive solution state that they do not want to put all of their eggs in one basket by allocating 100% of their assets to such a fund.
A majority of both participants and nonparticipants find a guaranteed income target-date fund concept to be strongly appealing, according to AllianceBerstein. Among current target-date users, 69% of Actives and 53% of Accidentals say they would be likely to invest in a guaranteed income target-date fund, according to the report. For participants not currently using target-date funds, the likelihood of investing is lower, 43% and 39%, respectively.
AllianceBernstein conducted its fifth annual Web-based survey in March. It included 1,070 full-time employees, 18 or older, who worked for companies that offered defined contribution retirement plans.—Nevin E. Adams
Piggy Bank
Younger adults see need for larger retirement nest egg
Most young adults think they will need to be millionaires before they
retire, according to a new poll by the Northwestern Mutual Foundation’s
financial literacy Web site, Themint.org.
Visitors to the Web site, a collaboration between the Northwestern
Mutual Foundation, the charitable arm of Northwestern Mutual, and the
National Council on Economic Education (NCEE), were asked how much
money they would need to have saved in order to retire, and about 85%
of respondents ages 18 to 29 said they would need at least $1 million.
Almost half (45%) in that same age group said they would need at least
$2 million, according to a press release.
In comparison, only 60% of adults ages 30 and up indicated they would
need to save $1 million, and only 27% said they would need at least $2
million.
“While today’s adults think they’ll need one nest egg to retire, young
people think they’ll need a baker’s dozen,” said Meridee Maynard,
financial literacy expert and Senior Vice President, Northwestern
Mutual. “In contrast to their older counterparts, young adults see a
need to save more for retirement, which is wise given this generation
is expected to live longer than any in history.”
The poll also found that women expect to live longer than their male
counterparts, and yet their goals for retirement savings are almost
exactly the same. Almost 65% of women expected to live to at least 86
years old, compared to only 50% of men. However, about 30% of both men
and women said they would not need more than $1 million in retirement
savings, 70% said they would need more than $1 million, and about 40%
said they would need more than $2 million. —Rebecca Moore
Long-term 401(k) balances up despite recession
After rising for five years, the average 401(k) retirement account fell 24.3% in 2008, according to an analysis of participants in the Employee Benefit Research Institute/Investment Company Institute 401(k) database.
However, from year-end 2003 through year-end 2008, the average account balance among “consistent” participants grew 41.6%, rising from $61,106 at year-end 2003 to $86,513—an average annual growth rate of 7.2%, the study report said. The median 401(k) account balance among the consistent group also grew, rising 71.3% from $25,507 in 2003 to $43,700 in 2008.
About two in five, or six million, of the 401(k) participants with accounts at the end of 2003 in the EBRI/ICI 401(k) database had accounts at the end of each year from 2003 through 2008—making up the group of consistent participants (or a longitudinal sample), which removes the effect of participants and plans entering and leaving the database, the report says.
The group was similar with respect to age and tenure to the entire database at year-end 2003 but, by year-end 2008, the group had a minimum tenure of five years and was slightly older in age composition when compared with the year-end 2008 cross-sectional database.
The consistent group’s account balances tended to be higher compared with account balances in the overall database at year-end 2008. According to the report, at year-end 2008, the average 401(k) account balance of the consistent group was almost double the average account balance of $45,519 among participants in the entire database. The median 401(k) account balance among the consistent participants was nearly three-and-one-half times that of $12,655 among participants in the entire database.
For both the consistent group and the overall database, younger participants or those with shorter job tenure tended to have smaller account balances, while those who were older or had longer job tenure tended to have higher account balances. Within the consistent group, participants in their 20s at year-end 2008 had an average account balance of $18,598, compared to an average of $125,052 for participants in their 60s.
However, the report said participants who were younger or had fewer years of tenure experienced the largest increases in account balances during the five-year period. The report explained that, because younger participants’ account balances tended to be small, contributions produced significant account balance growth. In contrast, the average account balance of older participants or those with longer tenures showed more modest growth since investment returns, rather than annual contributions, generally account for most of the change in accounts with larger balances. In addition, participants in their 60s tend to have a higher propensity to make withdrawals. The analysis of the EBRI/ICI 401(k) database found the bulk of 401(k) assets continued to be invested in stocks. On average, at year-end 2008, 56% of 401(k) participants’ assets was invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Forty-one percent of assets was in fixed-income securities such as stable value investments and bond and money market funds.
Three-quarters of 401(k) plans in the database included lifecycle funds in their investment lineup at year-end 2008. Nearly 7% of assets was invested in lifecycle funds and 31% of 401(k) participants held lifecycle funds.
Across all age groups, more new or recent hires invested their 401(k) assets in balanced funds, including lifecycle funds. At year-end 2008, 36% of the account balances of recently hired participants in their 20s was invested in balanced funds, compared to 28% in 2007, and about 7% in 1998. Almost 23% of the account balances of recently hired participants in their 20s was invested in lifecycle funds, compared to almost 19% at year-end 2007.
Participants Keep Savings Intact
Despite the recent hard financial times, the analysis of the EBRI/ICI 401(k) database found participants’ 401(k) loan activity was stable. In 2008, 18% of all 401(k) participants eligible for loans had a loan outstanding against their 401(k) account, the same percentage as at year-end 2007 and year-end 2006. The ratio of loans outstanding to participants’ remaining account balance was 16%, on average, at year-end 2008, similar to the year-end 2002 level.
The study report said outstanding loan balances were more likely among participants in their 30s, 40s, or 50s.
Fifty-nine percent of the 401(k) plans for which loan data were available in the 2008 EBRI/ICI 401(k) database offered a plan loan provision to participants.
The database includes 24 million 401(k) plan participants in 54,765 plans, holding more than $1 trillion in assets. —Rebecca MooreMore Articles
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