Data & Research September 15, 2011

U.S. Employees’ Retirement Preparedness Remains Low

U.S. employees’ retirement preparedness remains low despite a positive trend in employees improving their finances and putting greater emphasis on retirement, according to Financial Finesse.
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Most employees have not seen a retirement projection; 57% of employees at pre-retirement age, between 55 and 64, said they had not run a calculation to estimate whether or not they were on track to replace 80% of their annual pre-retirement income (or their goal) in retirement. This number grew with younger generations: 68% of employees age 45-54, 67% of employees age 30-44, and 73% of employees under 30 indicated they had not run a calculation and didn’t know if they were on track to retire, Financial Finesse found in its research. 

Employees who reported they are on track to retire had an average wellness score of 7.2 out of 10. They also had sound money management skills such as having an emergency fund in place, paying credit card bills in full each month, and having a plan to pay off debt. Both those who know they are not on track and those who don’t know whether they are or not scored far lower, with a 4.2 wellness score for those not on track and 4.7 for those who don’t know.

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Financial Finesse found that basic money management skills are essential to employees’ retirement preparedness and appear to be a key reason why some Americans are more prepared for retirement. There were significant correlations between retirement preparedness and having an emergency fund, effectively managing debt, and paying credit card bills in full. While U.S. employees improved their money management skills post-recession, most are still in a position where they need to make further improvements in order to free up more dollars to save for retirement.

Liz Davidson, CEO and Founder of Financial Finesse, says the report’s findings are especially disconcerting because of decreasing government and employer subsidized retirement benefits. Employees will not be able to meet their retirement goals unless they make significant improvements to their saving and planning behavior.

“Employees are not doing enough to ensure their retirement considering the new normal is a retirement supplemented by more of our own savings,” she said. “The environment is changing faster than employees are. They need to further accelerate their savings to compensate for the fact that they can no longer depend as much on their employers and the government for retirement income.”

The Markets September 15, 2011

Callan DC Index Falls Behind Average Corporate DB Plan

The Callan DC Index eked out a negligible 0.23% return in the second quarter of the year.
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This put the Index’s return well behind that of the average corporate defined benefit (DB) plan’s 1.31% gain for the period. Since its 2006 inception, the average corporate DB plan has bested the DC Index by more than 1.5 percentage points annually.

The performance of the DC Index compares more favorably to the average 2030 target-date fund (TDF) over the past five and a half years: 3.68% versus 3.30% respectively on an annualized basis. During the second quarter, however, the average 2030 TDF outperformed the DC Index marginally by 23 basis points.

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The average 2030 fund has a higher equity allocation than the plans of the DC Index (78% for the 2030 fund versus 65% for the DC Index); the typical corporate DB plan differs from plans in the DC Index by offering greater diversification into such asset classes as alternatives.

In the five and a half years of the Index’s existence, total annualized growth of participant balances clocks in at 6.95%. Notably, half of this growth comes not from investment gains, but from plan sponsor and participant contributions (net flows)—reinforcing the importance of programs such as automatic contribution escalation, which can increase participant deferral levels, Callan said.

As has been the case in every quarter since the Index’s inception, TDFs once again garnered healthy net inflows. In contrast, domestic large cap equity funds and company stock funds saw large outflows—accounting for 51% and 40% of total outflows respectively for the quarter. Overall, though, Index turnover was light at 0.31%, compared to a historical average of 0.71%.

The share of equities in the DC Index continues to hover at around 65%, as it has done all year. While large cap equity has the largest share of plan assets at 23.5%, this is down materially from its high of 32% at the Index’s inception. The typical plan offers four large cap domestic equity funds (about the same number as in early 2006)—the highest number of funds for any asset class except target date funds. The Index’s overall equity allocation has declined nearly 5.5 percentage points since its inception.

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