Participants Still Need Basic Retirement Plan Education

According to MFS Investment Management’s (MFS) 2014 DC Pulse survey, nearly three-quarters (74%) of participants say having a little bit invested in each option of a 401(k) plan is the best way to diversify.  More than 20% say they have no idea how best to diversify a retirement account.

More than half (52%) of 401(k) participants are not aware of the tax impact on take-home pay from a contribution of $100, and nearly half (46%) say they believe the money saved in their retirement plans is a good source of funding for other financial needs, like paying off debt or saving for college.

The survey finds participants often contribute just enough to receive the maximum employer match, and nearly one-quarter (23%) of plan participants surveyed indicate they believe there is no additional benefit to contributing more than is necessary to receive the employer matching contribution. The number jumps to 37% among Generation Y respondents (younger than age 34).

More than one-third (37%) of survey respondents say a major drop in the stock market poses the greatest risk to their retirement savings—not contribution amounts or behaviors. Only 8% base plan contributions on projected retirement needs and goals, while 46% contribute what they feel they can currently afford. Only 17% believe the amount of time they are invested has the greatest favorable impact on their retirement account balance, and just one in four know early withdrawals may lead to tax penalties.

The survey also reveals many participants do not have a clear understanding of target-date funds and index funds—two of the most popular retirement plan investment options. Despite the fact that they are often the default option for many retirement plan participants, only 18% of participants say they believe investing in target-date funds is the ideal way to diversify a 401(k) account. Sixty-five percent of survey respondents incorrectly believe index funds are safer than the overall stock market, and nearly half (49%) believe index funds have better returns than the stock market.

The survey suggests 401(k) loans may not be as important to participants as plan sponsors think. Only 4% of survey participants say they would not participate in their 401(k) plan if their employer did not allow them to take a loan. "If you remove or significantly limit the ability to take a loan, you can cut down on the temptation to make short-term decisions, such as using retirement funds for short-term funding needs," said Ryan Mullen, senior managing director and head of MFS' Defined Contribution Investments practice. "This is one strategy that can decrease the opportunity for participants to make bad decisions and help keep them focused on a long-term investment horizon."

MFS, through Research Collaborative, an independent research firm, sponsored an online survey from February 4 to February 11, 2014, of 1,000 defined contribution plan participants in the U.S. between the ages of 20 and 69 who are employed and have at least $1,000 balance in a plan with their current employer. More information is here.