NEW YORK - An explosion of media coverage and better employer communications has made defined contribution plan participants remarkably more aware of the need to plan for retirement earlier in their careers.
Participants are even confident about their ability to save and invest wisely to provide for a comfortable post-work life, according to a new survey by Towers Perrin.
But the survey found a wide gap between participants' "feel good" assessments of their situations and actual changes in savings and investment behavior. And despite high confidence levels about their investment capabilities, many workers surveyed showed a surprising lack of understanding of investment vehicles and about how their employer-sponsored retirement plans really operate.
The survey of 1,000 Americans who work in companies with more than 1,000 employees found 81% accepted that the primary responsibility for providing retirement income was their own. And 79% said they have taken steps to ensure financial security in retirement, compared with just 25% in Towers Perrin's similar 1991 survey.
But what employees say they're doing and the reality are different, said Carol Steiger, a principal in the Cleveland office of Towers Perrin and a defined contribution plan communications specialist.
While the number who said they have taken measures to plan for retirement rose so dramatically over the past three years, the percentage of people saving in an employer-sponsored plan or privately for retirement was only slightly higher. Of the survey universe, 30% don't participate in a company-sponsored plan when it's available vs. 33% in 1991. About 20% of people do not save at all for the long-term future, vs. 23% in the last survey.
While it's not surprising that employees who already are saving and planning feel fairly confident about their retirement prospects, an amazing 59% of respondents living in households where no one is saving for retirement were still somewhat confident they'll retire comfortably. Of those people who had done little or no retirement planning, 52% also were confident of their old age income level. The survey was unable to pinpoint the source of such optimism among the employee universe, because their preparations for a long retirement obviously will fall short of the replacement income needed for the 38% who say they'll retire before age 60 and the 11% who intend to retire by 55.
"I think what we see here is a change of attitude among plan participants. They are much more highly attuned to retirement needs than ever before and perceive that they are taking steps to achieve their goals, but they are not really changing their behavior accordingly," said Ms. Steiger.
The amount of educational assistance given by their employers is correlated to the level of plan participation and retirement planning. Of the 16% of employees who said their employer gave "a great deal of educational assistance" about retirement, 62% already have done a lot or a fair amount of retirement planning. A high proportion of workers (47%) said their employer had offered little or no educational assistance, and consequently, only 41% have done a lot or a fair amount of retirement planning.
The results of the survey may provide employers some clues about who is not participating in the plan and why. Not surprisingly, the lowest rates of plan participation occurred among the younger, hourly and lower-paid employees (with household incomes of less than $35,000), as well as those who have received little employer educational assistance. The majority of those not participating in an employer-sponsored plan (31%) said they can't afford it. Another 8% weren't sure why they don't participate and 3% said they aren't interested. An 11% miscellaneous segment gave other reasons for not participating.
About 24% of non-participants said they hadn't joined an employer plan because they thought they could get better investment returns elsewhere.
"All these excuses can be fairly easily overcome through targeted, specific employee education," said Ms. Steiger. "Through modelling, you can easily show lower-paid employees how just a little bit set aside can make a difference in retirement through compounding. Even the sacrifice of the price of a can of pop per day can be shown as an easily understood and easily affordable way to start saving in a 401(k) plan. And it's fairly simple to illustrate the advantages of tax deferred saving in a defined contribution plan over an after-tax investment. For those employees who think they can do better with investments outside a qualified plan, you can dramatically show them what whopping returns they'd have to get to beat a 401(k) plan's tax advantages. Targeting communications to answer and overcome these objections is the key."
Half of the interviewees said their employer educational assistance has been "somewhat helpful" and 16% said it has been "very helpful." More than three-quarters of workers were comfortable or very comfortable about making investment decisions. But the reality gap uncovered by the survey shows that for many people, this confidence factor is based on very shaky knowledge of plan details and investment characteristics.
Of all participants, 39%, for example, don't know how their defined contribution plan assets are allocated, with a gender breakdown of 32% of men and 46% of women surveyed. More than 50% of participants with household incomes of less than $35,000 are unsure of their asset allocations, vs. 27% of those with incomes of more than $50,000.
The poor understanding of the nature of typical investment vehicles casts further doubt on employees' expressed confidence in their investment abilities. Diversified equities were perceived to be risky by 62% of participants and company stock to be risky by 37%. Stocks were considered a neutral investment by 22% and company stock by 32%. Almost one-quarter (24%) thought company stock posed little or no risk. Bonds were considered to be little or no risk by 62% of the survey population, with 22% calling them a neutral investment. Other fixed-income options, GICs and money market funds, were mostly considered risk-free or neutral investments.
Given such confused understanding of the investment characteristics of available plan options, 33% of those who knew how their defined contribution plan assets were allocated had nothing invested in equities.
About 31% of those younger than 30 had no money at all allocated to equities.
"Despite what they say and despite their general confidence levels about retirement and investing, it's clear that many employees are not changing their behavior and need more help to really understand what their DC plan offers and how to use the features correctly," said Ms. Steiger.