Defined contribution investors are extremely concerned about their future in retirement, particularly those 50 or older, signaling a tremendous opportunity for 401(k) plan providers to do a far better job of addressing and allaying these fears.
Yet instead of building out robust educational and communications programs, most 401(k) providers focus either on offering a no-frills, low-cost plan or, at most, simply encourage greater contributions.
They are also missing out on a growing demand for guaranteed lifetime income, inflation protection and healthcare coverage by not including annuities, TIPS and healthcare-related products in their lineups.
"While a handful of plan administrators target their ability to do well by the participant as their competitive differentiator, most focus on being low cost as their competitive differentiator, rather than doing a great job for employees," said Ronald L. Bush, a principal with BrightWork Partners. The retirement plan consulting firm has just released the findings of a survey of 1,098 corporate 401(k), public school and non-profit 403(b) and government 457 plan participants, titled "Voice of the DC Plan Participant." The Retirement Income Industry Association recently released the study.
And those voices express numerous concerns.
Sixty-six percent expect GDP growth of 1% to 2% over the next 12 months, and 28% even think the economy will be in recession. Only 6% expect robust GDP growth of 3% or more.
Thirty-six percent are either somewhat or very concerned they could lose their job in the next 12 months, 29% are not very concerned, and 25% are not concerned at all. Among those 50 to 64, however, concern about job security spikes to 47%.
"This shows the highest level of anxiety we have seen since we started the survey nine years ago," Bush said. "While anxiety levels are always at their highest after the bottom of an economic cycle, because people have yet to feel the tangible impact of a recovery, there appears to be a rising concern about the impact of the government debt, standards of living and the decline of America. Investors seem to think we're not just in a cyclical decline but on the verge of a secular decline."
At the outset of the recession, DC providers tried to quell investors' plummeting market by encouraging them to stay the course, Bush noted. While those messages have subsided, plan providers could now address some of the growing concerns of investors by emphasizing how they can take control of their retirement savings through better diversification and higher contributions, he said.
And given that these concerns rise sharply among those 50 or older, plan providers could target their messages to different age groups, Bush said.
"There is a growing movement to micro-target different age and demographic groups-MassMutual, Prudential and Fidelity have come out with targeted participant-directed communication-but so far that is not commonplace," Bush said.
Concerns have prompted 33% to consider delaying retirement. Among those 50 to 64, that jumps to 53%, and among those 65 or older, 70% would like to delay retirement-a clear sign that they have not saved enough.
"In addition, there is widespread concern about healthcare costs-bordering on near-panic among the oldest participants," Bush said.
Sixty-three percent of participants are not confident they will know how much they will need for healthcare costs in retirement, and 60% fear they will not have enough money to cover healthcare. Fifty-seven percent are afraid that inflation will erode their nest egg, 51% fear they might outlive their assets, 48% don't think they will be financially ready for retirement, and 45% expect they will have to reduce their standard of living.
In addition, participants are aiming to replace 78% of their income, but a mere 17% are "very confident" they will be successful in doing so.
The survey also showed that while 72% said they would be interested in an investment option that could provide them with a guaranteed monthly income in retirement (20% were very interested and 52% were somewhat interested), only 25% of 401(k) plans currently offer an annuity feature. And that interest in monthly income in retirement surges to 68% among those 50 to 64.
Nonetheless, few investors currently focus on income and allocation, the survey showed. Asked what they spend "a great deal of attention" to in their defined contribution plan, 41% said their balance and 28% said performance. Only 25% spend much time looking at how their account is allocated among different types of investments, a mere 21% pay attention to how much income their account might generate in retirement and just 19% look at the investment and administrative fees they pay.
So far, "most of the annuities that have been available in defined contribution plans have been complicated and participants don't understand them," Bush said. "The annuities try to address several problems and do none of them particularly well. Problem number one is locking in a value while allowing the investor to participate in the upside of the market, and problem number two is converting a balance into a retirement income stream"
Bush believes a better solution would be more conservative annuities that lock in a value through a highwater mark and that are sold through an insurance facility.
"There is a substantial and growing need for income-generating products," Bush said. "What is currently available is not gaining traction, and while we are not there yet, in time, I am certain that annuities and other income-producing products will become available in 401(k) plans."
The survey also found other glaring areas for improvement in defined contribution plans. Participants, including those 50 or over, dramatically underestimate the maximum they can contribute to their plan (it's $16,500 a year for those under 50 and $22,000 a year for those 50 and over).
Most participants contribute a maximum of 4% to 6% of their salary because that is what their employer matches, Bush noted. While most people are not in a financial position to contribute the maximum, plan providers could provide contribution calculators with estimated tax rates to show participants how tax breaks lessen the reduction in their take-home pay as they contribute more, Bush said.
Finally, while plan providers may believe that auto enrollment and target-date funds are the solution to boosting participation and contribution rates, Bush believes that plan administrators should continue to drive home the benefit of larger contributions to participants.