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Retirement Plan Participants Need to Prepare for Lower Returns

Retirement plan sponsors and participants are not prepared for the lower expected investment returns in the future, BlackRock finds, and it suggests actions they can take.

By Rebecca Moore editors@assetinternational.com | March 01, 2017
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American workers are increasingly confident about their prospects for a financially secure and satisfying retirement—but many are not prepared for a coming period of lower investment returns forecast by the financial services industry, according to the latest DC Pulse Survey from BlackRock.

More than half (56%) of plan participants believe they are on track to retire with the lifestyle they want and nearly seven in 10 expect to be able to save enough to meet their financial goals in retirement. However, participants’ optimism might be based on some flawed assumptions about future investment returns.

New consensus forecasts by Horizon Actuarial—based on a survey of 35 financial industry firms (including BlackRock)—suggest that, for the foreseeable future, stock and bond returns could be half that of recent decades. Yet, 66% of workers believe that over the next decade, returns on their savings will continue to be in line with what they have experienced in the past, while 17% believe they will experience even higher returns. Nearly two thirds (65%) of workers report they are unaware that industry expectations for future returns are notably lower than what they had seen or experienced in the past.

Many plan sponsors also have misperceptions about the likely return environment for retirement assets. Seventy percent of sponsors believe the annualized market returns for U.S. stocks over the next 10 years will be the same as or higher than the past. The same goes for bonds: 78% believe bond returns will remain consistent or be higher than they have been previously.

In the face of the new returns information, the confidence of both workers and sponsors slips. When presented with the forecasts, 39% of participants indicate they feel very or extremely concerned. Regarding the effectiveness of workers’ retirement planning, the survey shows that workers become less confident when it comes to such issues as whether they are saving enough to get a desired monthly income (32% confident vs. 44% initially) and taking an appropriate level of risk to meet retirement goals (33% vs. 53%). Similarly, the confidence of sponsors that workers are saving enough for the income they want drops 11 percentage points (to 38% from 49%).

Perhaps most concerning is that 70% of participants (as well as 54% of sponsors) say they do not expect to do anything different in the next 12 months to prepare for potential lower returns.

NEXT: What plan sponsors and participants can do