Data & Research May 29, 2014

Participant Retirement Savings Rebounded from Recession

Average 401(k) account balances have increased 93% since the economic downturn of 2009, according to research from The Principal Financial Group.
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While much of the increase reflects a rebounding market, the study found a significant increase in participation and savings rates since the market collapse, with account balances rising 17% in 2013 alone to an average of $54,000.

The study found a significant increase in the number of employees taking action to increase their contributions or deferrals into their employer’s plan. The number of participants choosing to increase their contribution rates has increased nearly 70% since 2009. The average employee contribution rate has increased 14% from 2009 to 2013.

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“The economic downturn may finally be in the rear view mirror, but the lessons learned from the crisis are hopefully influencing our savings habits as a nation moving forward,” says Jerry Patterson, senior vice president of retirement and investor services for The Principal. “While we still have a lot of work to do to help Americans save at more adequate levels for retirement, these numbers are a positive sign that retirement savings are moving in the right direction.”

Patterson says changing plan design features to help make savings more automatic can capitalize on the upward trend and accelerate overall participation and savings rates.

The Principal recommends several key automatic plan design features, including:

  • Automatic enrollment with at least a 6% elective deferral;
  • Automatic escalation of deferrals by at least 1% per year up to 10%;
  • Re-enroll all existing employees into the plan at least one time at the default deferral rate;
  • Stretch the match by using a formula that incents employees to defer at higher levels in order to get the full employer match; and
  • Use an asset allocation choice as the qualified default investment alternative.

The study, conducted by The Principal Knowledge Center, analyzed more than 1.8 million participants enrolled in an employer 401(k) plan with the Principal Financial Group from 2009 to 2013.

Data & Research May 29, 2014

Adviser Annuity Use Down as ETFs Gain Steam

New research from a coalition of retirement industry groups suggests financial advisers are moving away from the use and recommendation of annuities, despite industry buzz around income products.
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Only about 41% of advisers surveyed for the recent 2014 Trends in Investing Survey said they currently use and recommend variable annuities, compared with a high of 58% observed in 2006 and 2008 editions of the survey. Even fewer advisers (29%) said they are currently using fixed annuities in client investment strategies, down from about half in 2010.

Survey results indicate an overall increased use of cash and equivalents since 2006, when 53% percent of professional financial planners surveyed were using and recommending cash, compared with 79% today.

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“The study seems to point to a shift toward investments with greater transparency and liquidity,” explains Valerie Porter, director of the Financial Planning Association (FPA) Research and Practice Institute, one of the industry groups behind the survey. “Perhaps advisers are responding to consumers’ demand for lower-cost investments that allow them to be more nimble in their investment approach. And I think it’s safe to say everyone values cash a little more since last decade’s market collapse.” 

Other key survey findings show the following:

  • While 50% of advisers indicate that they do not plan to decrease the use and recommendation of any investment vehicles in the next 12 months, 15% will decrease use of individual bonds and 16% will decrease use of non-wrap mutual funds.
  • Although the majority of advisers (57%) believe a blend of active and passive management provides the best overall investment performance, more advisers increased their use of passively managed funds over the last year (30%) than increased use of actively managed funds (18%).

The survey also showed that advisers maintain a positive long-term economic outlook, with 57% being “bullish” for the next five years, compared with 39% who are “bearish.”

The 2014 Trends in Investing Survey showed that 79% of advisers currently use or recommend exchange-traded funds (ETFs) with clients, up from just 40% in 2006. Further, 39% of advisers surveyed said they plan to increase their use of ETFs over the next 12 months—the highest anticipated increase among 17 investment vehicles.

Advisers expect inflation to rise over the next five years, to more than 3%. They are primarily using equities as inflation hedges, according to the survey, although alternative investments such as real estate investment trusts (REITs) and commodities are also commonly used as hedges.

The majority of advisers are currently re-evaluating the asset-allocation model they typically recommend or implement. When asked why, 56% of those advisers said anticipated or existing changes in the economy in general are necessitating changes to their asset allocations. Many also indicated they regularly review and adjust asset allocations regardless of market activity.

Forty-five percent said anticipated or existing changes to specific investments are making them re-evaluate asset allocations, and 28% said anticipated changes in inflation are making them reconsider allocations.

A full summary of The 2014 Trends in Investing Survey, sponsored by the FPA Research and Practice Institute and the Journal of Financial Planning, is available here and includes additional details and narratives.

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