Are Your Participants Too Conservative?

A survey from MFS Investment Management—outlined during a panel at the event—found 46% of respondents said they view their retirement assets as savings, not investments.

Fewer than half (44%) of Gen Y investors, who have time on their side, consider themselves aggressive investors. Even among those who do, they pick a conservative option when asked to select a hypothetical investment, MFS found.

More than half of the Gen Y investors (55%) consider 401(k) assets savings rather than investments—a higher number than those who take this conservative view among Gen X investors (only 42% consider their plan assets as savings), and Baby Boomers (44% of whom have this view).

Gen Y is overconfident about retirement, but perhaps wrongly so because of their conservative view of investments despite having a long savings horizon, explained panelist Kristen Colvin, director of consultant relations at MFS. This generation unrealistically expects to generate a 9% return on a portfolio with 35% allocated to fixed income, she added.

All generations seem to have trouble understanding the connection between their allocations and risk, said Ryan Mullen, senior managing director at MFS. The typical participant expects to earn 8% annually, even though on average, participants have one-third of their assets in conservative investments. They also do not see the underperformance of their assets as a major risk to their retirement, the survey found.

Forty-one percent of plan participants identify themselves as aggressive investors, but when asked how they would invest a hypothetical sum, more than one-third (36%) express a desire to invest conservatively. Their actual allocations to conservative choices (31%) like bond and money market funds—are also higher than would be expected from truly aggressive investors.

For investors who describe themselves as conservative, 43% have no idea how their 401(k) assets are allocated, he added.

Mullen and Colvin shared several tips for helping participants understand and manage risk including diversifying, but at the same time simplifying, the plan design. They also suggested providing employee guidance and tools to help participants understand what they are investing in.

Plan sponsors should use terms participants can understand (like growth, income, inflation and liquidity) to simplify the core menu. “The point is thinking about communicating investment lineups to participants in ways that they can understand,” Colvin concluded.