Data & Research April 7, 2009

Turmoil Dents Participant Confidence

It should come as no surprise to discover that nearly two-thirds of surveyed participants say their retirement confidence has declined in the past twelve months.
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Indeed, half of surveyed participants said that the recent financial turmoil has “caused me to think a lot more about my retirement income,’ according to a new study sponsored by Barclays Global Investors (BGI), and conducted by Boston Research Group.
However, the online study, “401(k) Participant Attitudes, Behavior, and Intentions,” based on the results of a survey conducted in March 2009 by The Boston Research Group that included the perspectives of a thousand current 401(k) plan participants, found that the greatest impact on retirement confidence was among participants who were already concerned about their prospects. In fact, two-thirds of participants who were previously confident that they would have enough to live comfortably say their confidence level was unchanged, and 18% said their confidence had actually increased.
On the other hand, among those who were already “worried I’ll never be able to retire,” 85% said that that level of “confidence” had decreased and only 13% said it was unchanged, while 83% of those who previously had said they were “not so sure how” they would make ends meet in retirement said they were now even less confident (14% said that was unchanged). However, among those who had been “somewhat confident,” 57% said that confidence had declined, compared with 38% who said their confidence level was unchanged (5% said they were now more confident). The study made no attempt to correlate participant confidence with their actual level of savings and/or preparation.
“Horror Movie”
That declining confidence has apparently had an impact on participants’ willingness to look at their statement, with 33% saying that they had put off looking at those reports. Once again, the confidence level played a role in what Boston Research Group founder Warren Cormier called the “horror movie” syndrome, which he described as a situation where participants effectively covered their eyes, and only snuck a peek at their statements through their fingers if they anticipated bad news. Nearly half of the “worried I’ll never be able to retire” group said they had put off looking at those statements–and even more than one-in-five (22%) of the confident group had done so as well.
That trend has additional negative implications Cormier told attendees at a BGI event in New York today, noting that participant statements are one of the most critical means not only of getting participants’ attentions, but also motivating them to take action. “We know behaviorally that lack of communication tends to significantly raise fear,” he said.
Asked how they planned to recover from their retirement plan losses, nearly half (45%) of all 1,000 participants surveyed said they would “save more,” though Cormier noted that studies have shown that kind of good intention tends to be akin to people who, on New Year’s Day say they are going to go to the gym regularly. Still, even 26% of those in the most concerned group said this was their alternative, as did 55% of the most confident group.
Plan “Bs”?
Among participants whose 401(k) balances had declined over the past 12 months, 28% said they planned to delay retirement, while 20% said they planned to “work until they die.” Nearly as many (19%) simply said they “have no idea” as to how to make up the losses. Just over one in four (26%) planned to make “better” investment choices, while 17% indicated they would invest more aggressively and 14% planned to invest more conservatively.
As for how that declining confidence is impacting the perceived value of their 401(k) plan as an employee benefit, 31% said they “highly” valued the benefit, and 52% said it was “valued.” More than half of those who were in the most confident group “highly valued” the program, while 21% in the least confident group rated it that highly. Regardless of confidence level, Cormier said they saw “no evidence” of any interest by participants in discarding the 401(k). In fact, asked to contemplate the impact of the recent financial turmoil, 46% said that their workplace savings plan was more important, and a matching number said it was just as important. Only 8% said it had declined in importance.
“Guaranteed” Results

 

Not surprisingly in view of the recent turmoil, surveyed participants did evidence an interest in guarantees, specifically as a means to shore up their retirement confidence. Nearly three-quarters (73%) said that “knowing I would have a consistent, guaranteed monthly income in retirement other than Social Security” would have that affect (you have to wonder about the other 26%), a sentiment that was consistent across the confidence spectrum (64% of the most confident group, 83% of the least confident). “Knowing my health care costs would be covered” improved the confidence of 73% of the total group (60% of the most confident, 87% of the least confident), but “knowing how much money I would need to retire comfortably” was cited as a positive factor by just 61% of the group (ironically, just 56% of the most confident group agreed with this position, compared with 67% of the least confident group – suggesting some softness in the confidence levels).
Asked to name the “one thing” they would change about their 401(k) plan, nearly half (49%) of the entire participant group cited “providing a choice for securing guaranteed income in retirement” – the number one option, according to Cormier. However, that option was considerably more important to the least confident group (61%) than the most confident group (22%). The most popular option among the most confident group was “providing more investment choices, cited by 40%, while just 15% of the least confident group embraced that as a valued change. The survey data indicated that 90% of survey respondents would be interested in a 401(k) plan option that would provide a means of securing guaranteed monthly retirement income – and little wonder, since nearly as many (87%) said they didn’t believe Social Security alone would provide a sufficient level.
Compliance April 7, 2009

Is the 401(k) Ready for Change?

The 401(k) may be “down,″ but the reports of its death are as “exaggerated″ as Mark Twain’s death once was, according to a recent presentation.
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Kristi Mitchem, Head of Defined Contribution, Barclays Global Investors, noted that participant balances had been significantly impact by the recent downturn, citing data from Hewitt Associates that said the average 401(k) participant balance was down 28% through December 31, 2008 from the year before.
However, despite the dramatic market sell-off, Mitchem, speaking at BGI’s 2009 Retirement Breakfast Briefing, noted that a return to normalcy would bring a quick recovery for most investors. Specifically, citing data from the Employee Benefit Research Institute (EBRI), she noted that younger participants (who have smaller balances, on average), could recover in as little as two years, and that even older savers could recover in five years.
That said, Mitchem said that a comparison of the current 401(k) model to that kind of benefits/security provided by a defined benefit plan illustrated some stark differences, and some room for improvement(s).
A 401(k) “Makeover’
Noting that contributions to defined benefit (DB) plans were mandated, that the investments of those programs were typically institutionally priced, that there were significant vesting/accumulation periods, and that a “lifetime income’ option was “always offered,’ and sometimes mandated in those programs, she made a case for “making over’ the 401(k). She noted that the Pension Protection Act (PPA) had done much to strengthen and streamline the 401(k) contribution structure, through the use of automatic enrollment and contribution acceleration (both of which are experience an uptick in usage since the PPA’s passage), as well as the availability of qualified default investment alternatives (QDIA).
Mitchem noted, in fact, that more than half of the largest 1,000 employers currently use automatic enrollment, and indicated that about a third of all plans currently do. Furthermore, she noted studies that indicate that automatically enrolled participants tend to stay where you default them, and cited the findings of a Harvard research team that participants defaulted at a deferral rate as high as 9% (the “default comfort zone’) were unlikely to exodus from that rate.
Distribution “Defaults’
She also noted that rollover options were increasingly available, though not mandatory, in 401(k)s, and that the prominence of lump-sum availability contributed to a significant “leakage’ from the retirement savings system, particularly among those with smaller account balances.
In fact, those distribution “defaults’ meant that, according to a 2007 Hewitt Associates study, that 40% of those participants eligible for a distribution take it in cash (25% roll directly to an IRA, while the remaining 25% stay in the plan). Of those taking a cash distribution, 27% “consume’ it, while 62% reinvest the money in an IRA or other employer plan, and 10% invest the funds.
Suggested Solutions
As for ways to address those problems, Mitchem suggested:
  • Making plan-to-plan transfers more seamless
  • Encouraging participants to remain in the plan
  • Offering plan sponsors an incentive to accept contributions, and
  • Requiring that participants roll over their balances prior to liquidation
Mitchem noted that the issue of retirement income looms large, both because people underestimate their chances of outliving their income, and that they overestimate their ability to “self-insure’ their retirement income needs. However she noted that lifetime income options were not currently offered in most plans. She suggested that a legislative “nudge’ could serve to break down the barriers to annuitization, but that changes in public policy, sponsor education, and participant acceptance were also needed.

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