Data & Research April 30, 2010

Survey Finds Gaps in Plan Sponsor Goals, Roles

A new survey reveals a potential disconnect between plan sponsors and plan participants.
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Employers still view retirement plans mainly as a benefit rather than as the primary means for their employees to support themselves after retirement, according to a new survey by Wells Fargo Institutional Retirement and Trust.  Fewer than half (45%) say the “primary” goal of offering a retirement plan to their employees is to “provide employees with the means to achieve a financially sound retirement,” according to the report, while slightly more (51%) say the primary reason they offer a retirement plan is to “provide competitive benefits to attract and retain employees.”

Disconnect “Ed”

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Asked why they think employees participate in a company-sponsored 401(k) plan, only about a third (30%) of employers say it is because they think participants want to save enough to retire comfortably.  The most common response, cited by 42% of employers surveyed, was that employees participate in order to take advantage of the company’s 401(k) match.

However, when Wells Fargo asked that question of employees in 2008, those responses were reversed; Just over a third (35%) of employees said they were participating so that they could save enough to retire comfortably, while only 33% cited the company match as their incentive.

“We have a real crisis of retirement savings and believe companies can play a crucial role in addressing this by educating and motivating their employees to prepare for a solid and sustainable retirement,” said Laurie Nordquist, director of Wells Fargo Institutional Retirement and Trust. “The fact that fewer than a third of plan sponsors think employees participate in 401(k) plans because they want to retire comfortably suggests there is room for improvement in educational efforts to make sure employees understand the need for income that will see them through retirement. That should be what motivates employees to participate in the plan, above all else.”

 

Goals Oriented

When companies were asked the question “What is your primary goal for your participants in 2010,” the responses varied, with about a third (35%) saying it was to “educate participants on retirement needs and how much to save.” 

Roughly one-in-five (22%) said the primary plan goal is to “increase participation,” and another 22% were focused on increasing the amount participants save.”  Other objectives cited were:

  • 9% - improve investment diversification
  • 4% - reduce loans/in-service withdrawals taken
  • 2% - facilitate distribution planning (to make savings last through retirement)
  • 5% - do not know

As for the changes they planned to make to their plan within the next 18 months:

  • 14% - increase the number of investment funds
  • 12% - increase matching or other employer contributions
  • 12% - add a Roth deferral feature
  • 10% - add automatic enrolment

On the other hand, nearly one-in-four (39%) said they did not anticipate making any changes during that period. 

Asked to identify “the greatest challenge and concern about your company retirement plan,” about a quarter (26%) cited the “impact of market volatility on account balances,” and a nearly identical 25% said “participant use of the plan.”  One-in-five (19%) said “providing employees with the financial ability to retire.”

When plan sponsors in the survey were asked whether they measure if their employees are financially prepared for retirement, about half (49%) said “they do not measure” results.  A mere one-in-ten indicated they project each employee’s retirement income and compare it to expected needs.

Education Stations

Asked to identify their methods of educating/communicating with participants, the most commonly cited (95%) was distributing the summary plan descriptions (SPD), summary of material modifications, and other mandatory notices.  Ninety percent noted the overview of plan features/benefits during orientation.  Also noted were:

  • 67% - employee meetings
  • 65% - retirement planning worksheets and online calculators
  • 57% - access to a financial adviser
  • 55% - providing frequent (at least quarterly) information on plan features and advantages
  • 44% - materials targeted to selected groups based on participation, diversification, etc.
  • 40% - personalized materials
  • 36% - savings and investment workshops

Asked how they measure the effectiveness of their retirement education programs, most (61%) said they gathered feedback “informally.” A third of that number (22%) said they measure data “before and after” a communication event to see what worked.

“Corporate America measures business performance every day,” said Joe Ready, director of Wells Fargo Institutional Retirement and Trust. “We need to take that mindset and help companies apply it to managing the success of their employees in retirement preparation. Companies play a critical role, and we want them to embrace this position.”

The 2009 Challenges and Goals for Retirement Plans survey and its resulting analyses are developed and sponsored by Wells Fargo & Company’s benefits consulting division, BPS&M. This is the 14th employee benefits survey conducted by BPS&M.    

The survey analysis includes information on defined contribution and defined benefit plans. Boston Research Group conducted the survey entirely online during the fall of 2009. Data were collected from 357 employers from organizations of all types and sizes and from all regions of the U.S. Survey results can be obtained by contacting BPS&M at 615-665-1640 or BPSMsurvey@wellsfargo.com.

 

The Markets April 30, 2010

Mutual Funds Primarily Used for Retirement Savings

In 2009, 76% of mutual fund-owning households indicated that their primary financial goal for their fund investments was saving for retirement, according to the Investment Company Institute (ICI).
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The 2010 Investment Company Fact Book released by ICI found 90% of households that owned mutual funds held shares inside workplace retirement plans, individual retirement accounts (IRAs), and other tax-deferred accounts. 

Among those households that made their first mutual fund purchase in 2000 or later, 68% did so inside an employer-sponsored plan. Among those households that made their first purchase before 1990, 56% did so inside an employer-sponsored plan.  

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Although 69% of mutual fund investors owned funds outside of employer-sponsored retirement accounts, many were also saving for retirement. Fifty-two percent of mutual fund–owning households held funds in their IRAs—in many cases, due to rollovers from 401(k)s or other employer-sponsored retirement plans.  

At year-end 2009, mutual funds accounted for $4.1 trillion, or 25%, of the $16 trillion U.S. retirement market, according to ICI. The remaining $11.9 trillion of year-end 2009 retirement market assets were managed by pension funds, insurance companies, banks, and brokerage firms. The $4.1 trillion in mutual fund retirement assets represented 36% of all mutual fund assets at year-end 2009.  

Assets in defined contribution plans have grown more rapidly than assets in other types of employer-sponsored retirement plans over the past quarter century, increasing from 27% of employer plan assets in 1985 to 40% of assets at year-end 2009. At the end of 2009, employer-sponsored DC plans—including 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other DC plans—held an estimated $4.1 trillion in assets. With $2.8 trillion in assets at year-end 2009, 401(k) plans held the largest share of employer-sponsored DC plan assets.  

Two other plan types—403(b) plans and 457 plans—held another $851 billion in assets. The remaining $483 billion in DC plan assets were held by other DC plans without 401(k) features. 

At the end of 2009, $1.5 trillion of 401(k) plan assets were invested in mutual funds. Mutual funds’ share of the 401(k) market increased to an estimated 55% at year-end 2009, up from 51% at year-end 2008, but still below the 57% share reached in 2007. 

Retirement is not the only financial goal for households’ mutual fund investments. Forty-nine percent of mutual fund-owning households reported that reducing their taxable income was one of their goals; 46% listed saving for an emergency as a goal; and 26% reported saving for education among their goals.

How Retirement Savers are Investing 

Retirement savings accounts were a significant portion of long-term mutual fund assets (47%), but were a relatively minor share of money market fund assets (12%). Similarly, as a share of households’ mutual fund holdings, retirement savings represented 50% of households’ long-term mutual funds, but only 18% of households’ money-market funds, according to the 2010 Investment Company Fact Book released by the Investment Company Institute (ICI). 

Of the $4.1 trillion in mutual fund retirement assets held in IRAs, 401(k) plans, and other retirement accounts at year-end 2009, $2.3 trillion, or 58%, were invested in domestic or foreign equity funds. Domestic equity funds alone constituted about $1.8 trillion, or 44%, of mutual fund retirement assets. By comparison, about 45% of overall fund industry assets—including retirement and nonretirement accounts—were invested in domestic and foreign equity funds at year-end 2009.  

At year-end 2009, $1 trillion, or about 25%, of mutual fund retirement assets were invested in fixed-income funds (bond or money market funds). Bond funds held $606 billion, or 15%, of mutual fund retirement assets, and money market funds accounted for $394 billion, or 10%. The remaining $709 billion, or approximately 17%, of mutual fund retirement assets were held in hybrid funds. 

Assets in lifestyle and lifecycle mutual funds totaled $511 billion at the end of 2009, up from $336 billion at year-end 2008. Lifestyle mutual funds’ assets were up 45% in 2009, rising from $176 billion to $255 billion. Assets of lifecycle funds were up 60% in 2009, increasing from $160 billion to $256 billion. The bulk (84%) of lifecycle mutual fund assets were held in retirement accounts, compared with 45% of lifestyle mutual fund assets. 

Assets in 529 college savings plans increased 24% in the first three quarters of 2009, with $111.1 billion in assets at the end of the third quarter of 2009, up from $89.4 billion at year-end 2008. As of September 30, 2009, there were 9.4 million accounts. 

The 2010 Investment Company Fact Book is here.

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