Defined contribution plan executives must be alert to the “great investor divide,” two distinct investing approaches by participants that require different sponsor response, according to new research by AllianceBernstein LP. New York.
“It's important to understand the values of these two audiences because they are different,” said Thomas Fontaine, head of defined contribution investments at AllianceBernstein, referring to what his firm calls active investors and accidental investors.
The “actives” invest earlier in life, are more confident about their current financial condition and actively manage their investments, Mr. Fontaine said in a recent speech at the annual convention of the Plan Sponsor Council of America, held Sept. 19-22 in Las Vegas. Fifty-eight percent of “actives” refer to themselves long-term investors, according to the AllianceBernstein survey of 1,000 full-time employees whose employers offer a DC plan. (The online survey, conducted in February, selected people randomly and was not restricted to AllianceBernstein clients.)
The “accidentals” usually don't invest early in life, are unhappy with their financial circumstances and lack confidence in their investment ability, he added. Only 27% of “accidentals” consider themselves to be long-term investors.
The two groups also have different retirement savings goals. The actives say they are most interested in living comfortably and in financing retirement, while the accidentals' two top goals are being debt-free and having emergency money.
AllianceBernstein found that among both groups, “a stated investing intention is not always reflected in actual investing behavior.” Consequently, the firm recommends that plan executives use a variety of measures that encourage participant contributions — such as auto enrollment and annual auto escalation — and provide some flexibility, such as allowing participants to access their funds through loans and withdrawals.
AllianceBernstein's latest research showed that target-date funds have become more popular among both active investors and accidental investors, reaching the highest levels of use (41% among the former and 25% among the latter) since the firm began conducting its annual research of participant attitudes in 2005.
Satisfaction was high: 90% of active investors were either more satisfied or equally satisfied with their target-date funds' performance compared with other funds within their DC plans. Sixty-eight percent of accidental investors said they were more satisfied or equally satisfied.
Ironically, the AllianceBernstein research showed that active investors had greater — and incorrect — expectations of target-date funds than accidental investors. Presented with the statement: “Target-date funds guarantee that you will meet your income needs in retirement,” 59% of actives and 38% of accidentals said the statement was true.
“There's a disconnect about really understanding what a target-date fund means,” Mr. Fontaine said.
