Participants Make Conservative Investors

The results of a survey from asset management firm State Street Global Advisors (SSgA) shows that despite a bullish outlook on the market, participants are becoming increasingly conservative in their investment choices. In addition, participants are showing a preference for fixed-income, even though they generally lack a solid understanding of its role in building a portfolio.

Participants are positive about the financial markets and investing. Almost eight in 10 respondents who invested during the market downturn say they are contributing as much or more to savings now as they did five years ago. Survey findings also suggest that participants’ experiences over the past few years have taught them an important lesson about the cyclical nature of the markets.

The survey also finds that:

• Over three-fourths (76%) of participants say their defined contribution plan is in the same or better shape than five years ago;
• Over three-fourths (78%) of participants think that in five years the market will be the same or performing better than it is today; and
• Over three-fourths (79%) say they have maintained or increased their retirement account contribution levels since the financial crisis.

However, the experiences of the past few years have also made participants more cautious. The survey results indicate a shift toward more conservative investment behavior. Forty-nine percent of participants are currently investing more conservatively than they did five years ago, and only 7% of participants in defined contribution (DC) plans indicate that they are taking a more aggressive approach.

“Plan sponsors need to recognize participants’ new conservative mindset and design a plan menu that helps them invest to meet their financial goals,” says Fredrik Axsater, senior managing director and global head of defined contribution at Boston-based SSgA. “Participants are afraid of losing their retirement savings and are shying away from making more aggressive allocations. This is particularly concerning for younger investors, who may not understand how a conservative approach can limit the growth needed to fund retirement.”

Participants are implementing their more conservative investment approach by holding larger percentages in fixed income. However, survey results indicate there may be a fundamental misunderstanding by participants about bonds and their role in a retirement portfolio. More than one-third of participants believe bonds help minimize the impact of inflation, when in fact bond returns are highly vulnerable to inflation increases.

Additionally, many respondents failed to identify features of bonds that describe their fundamental roles in retirement portfolios. Roughly half did not choose “lower risk than stocks,” six in 10 did not choose “better portfolio diversification,” and seven in 10 did not choose “reduced volatility.”

An earlier SSgA survey, released in January 2013, indicates that participants want automatic features and guidance when making decisions about their investments and overall retirement readiness. The earlier survey also indicates that participants age 25 and under have a desire to learn more about retirement readiness.

“Our ongoing research into the attitudes and decisions made by plan participants continues to tell us that automaticity, plan design and engagement is the key to overcoming the impending retirement crisis,” says Axsater. “It is critical to understand the mindset of participants in order to build the right products that help them fund their retirement. Notably, fixed income allocations within DC core funds and target-date funds need to become more consistent with employee needs and preferences. A strong participant engagement program with action-oriented, clear communication can complement automaticity and strong plan design.”

Based on such feedback, SSgA recommends that plan sponsors:

• Take advantage of market optimism and encourage participants to continue saving more;
• Assess portfolios and identify participants who have allocations out of line with the age-appropriate allocations in target-date funds;
• Build a stronger core offering and ensure that the plan menu is simplified and easy to understand;
• Develop communications campaigns focused on bonds that help remedy misunderstandings about conservative options in their portfolios; and
• Consider target-date funds that help participants transition from their accumulated savings to a more secure retirement income.