401(k) New Year’s Resolutions: Improve Fixed Income Allocations, Build A Stronger Core And Use Target Date Funds Effectively

Despite a bullish outlook on the market, plan participants are becoming increasingly conservative with a preference for fixed income without a solid understanding of its role in their portfolio, according to the most recent survey of US workplace retirement plan participants released today by State Street Global Advisors (SSgA), the asset management business of State Street Corporation (NYSE: STT).

Five years after the global financial crisis, survey respondents are positive about the market and investing. Almost eight in 10 respondents who invested during the market downturn said they are contributing as much as or more now than they did five years ago and responses to open-ended questions suggest that their experiences taught them an important lesson about the cyclical nature of the markets. Their responses are especially noteworthy given generally weak wage growth and increased job uncertainty. Other findings include:
  • Seventy-six percent say their DC plan is the same or in better shape than five years ago
  • Seventy-eight percent think that in five years the market will be the same or in better shape than it is today
  • Seventy-nine percent have maintained or increased their contribution levels since the crisis

Despite this confidence, the survey uncovered indications of a shift toward more conservative investment behavior. Although investors traditionally invest more aggressively as their optimism increases, 49 percent are currently investing more conservatively than they did five years ago and only seven percent of DC investors indicate that they are taking a more aggressive approach.

“Plan sponsors need to recognize participants’ new conservative mindset and design a plan menu that helps them invest to meet their financial goals,” said Fredrik Axsater, senior managing director and global head of defined contribution, SSgA. “Participants are afraid of losing their retirement savings and are shying away from making more aggressive allocations. This is particularly concerning for younger investors who may not understand how a conservative approach can limit the growth needed to fund retirement.”

Participants are implementing their more-conservative investment approach by holding larger percentages in fixed income, but many responses indicate fundamental misunderstanding about bonds and their role in a retirement portfolio. More than a third of participants indicated that bonds help minimize the impact of inflation, when in fact bond returns are highly vulnerable to inflation increases. Additionally, many respondents did not select features of bonds that describe their fundamental roles in retirement portfolios. Roughly half did not choose “lower risk than stocks,” six in 10 didn’t choose “better portfolio diversification,” and seven in 10 didn’t choose “reduced volatility.”

In an earlier survey of US workplace retirement plan participants released by SSgA in January 2013, respondents indicated that they want automaticity and guidance when making decisions about their investments and their overall retirement readiness. The survey also called out a younger cohort of investors 25 and under, “Generation DC,” that reported an ongoing desire to learn more about retirement readiness.

“Our ongoing research into the attitudes and decisions made by plan participants continues to tell us that automaticity, plan design and engagement is the key to overcoming the impending retirement crisis,” continued Axsater. “It is critical to understand the mindset of participants in order to build the right products that help them fund their retirement. Notably, fixed income allocations within DC core funds and target date funds need to become more consistent with employee needs and preferences. A strong participant engagement program with action-oriented, clear communication can complement automaticity and strong plan design.”

Based on these insights from investors, SSgA recommends the plan sponsors:
  • Take advantage of market optimism and encourage participants to continue saving more
  • Assess portfolios and identify participants who have allocations out of line with the age-appropriate allocations in target date funds
  • Build a stronger core offering and ensure that the plan menu is simplified and easy to understand
  • Develop communications campaigns focused on bonds that help remedy misunderstandings about conservative options in their portfolios
  • Consider target date funds that help participants transition from their accumulated savings to a more secure retirement income

For more information on the survey or to subscribe to “The Participant” magazine, see the full brochure and more details on the survey, please click here.

About State Street Global Advisors

State Street Global Advisors (SSgA) is a global leader in asset management. The firm is relied on by sophisticated investors worldwide for its disciplined investment process, powerful global investment platform and access to every major asset class, capitalization range and style. SSgA is the asset management business of State Street Corporation, one of the world's leading providers of financial services to institutional investors


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