DC plan participants don't understand risks and allocations

Many defined contribution plan participants are investing without fully understanding investment option risks and asset allocation strategies, while not paying much attention to education tools offered by sponsors, new surveys show.

AllianceBernstein LP found that participants are increasing their investments in target-date funds and expressing greater satisfaction with these choices. At the same time, however, many aren't sure what target-date funds do or how they work.

A Towers Watson & Co. survey of DC plan executives revealed that few participants make good use of their employers' retirement/investment planning resources or make informed decisions regarding their retirement savings.

The surveys expressed optimism about increased participation tempered by frustration about participants failing to take full advantage of their opportunities.

“As much as you try to educate and disclose, there's a lack of understanding,” said Joseph Healy, a senior vice president at AllianceBernstein in New York.

“Employers feel they have given employees the tools, but that they don't use them,” said Robyn Credico, defined contribution practice leader for Towers Watson in Arlington, Va.

Consultants, providers and plan executives have long bemoaned participants' lack of interest in and understanding of building a foundation for retirement. Taken together, these surveys illustrate, at least for target-date funds, that participants are well-intentioned — investing in a diversified portfolio while reducing risk as they grow older — even if they're not well-informed.

The two surveys by AllianceBernstein, to be released Oct. 15, reveal that one-third of participants don't understand that target-date funds become more conservative as investors get closer to retirement. Of that figure, 13% answered incorrectly when asked about a glidepath and 20% responded “don't know.”

When presented with the statement that target-date investment balances are “guaranteed never to go down,” 34% incorrectly said the statement was true and 23% said they didn't know.

And when asked to comment about the claim that target-date funds “guarantee that you will meet your income needs in retirement,” 37% incorrectly answered “true” and 22% said they didn't know.

“We're seeing a disconnect in certain areas,” said Seth Masters, chief investment officer of the firm's defined contribution business. He noted most participants are becoming more satisfied with target-date funds even if they misunderstand the goals.

AllianceBernstein conducted two online surveys with national samples of 1,018 DC plan executives and 1,002 defined contribution plan participants.

Among “active” investors, 49% were more satisfied with target-date funds vs. other investment options in their DC plans, and 38% were equally satisfied with both, Mr. Masters said.

That combined 87% rate was up from 75% three years ago. (His firm defines “active” investors as those who enjoy investing and are more confident in investing.)

Among “accidental” investors, 28% were more satisfied and 44% were equally satisfied with target-date funds vs. other investment options, for a combined satisfaction rate of 72%.

Three years ago, the combined satisfaction percentage was 50%. (AllianceBernstein describes “accidental” investors as being less confident and more reluctant to invest and save.)

The increased satisfaction for both types of investors is in step with increased investing in target-date funds. AllianceBernstein found that 39% of active investors put money in target-date funds in 2012 vs. 29% in 2009 and 22% in 2005, the first year AllianceBernstein conducted the survey.

Among accidental investors, the percentage investing in target-date funds rose to 27% in 2012 vs. 21% in 2009 and 16% in 2005.

The Towers Watson survey, released Oct. 4, noted that defined contribution plan executives believe many participants are ignoring financial education information, even though 65% said they have provided adequate retirement/investment planning resources.

Only 9% of DC plan executives said employees have a retirement goal, and only 15% believe “a majority of employees make good use of available retirement/investment planning resources,” according to the survey.

In addition, 22% said employees “generally make informed decisions regarding their total retirement savings,” and 26% said employees have “realistic expectations of what (the employer's) primary DC plan can provide.”

Both AllianceBernstein and Towers Watson addressed the issue of DC plans incorporating lifetime income options, and both got mixed signals from participants and plan executives.

When AllianceBernstein identified nine DC plan features and asked which was most important, 67% of participants cited a “steady stream of income in retirement.” The next biggest responses were protection of principal (47%) and the ability to withdraw all or part of an account without fees or penalties (41%). Respondents could offer more than one choice.

(AllianceBernstein markets to DC plans a guaranteed lifetime withdrawal benefit through a target-date portfolio.)

In the Towers Watson survey, DC plan executives said the biggest reason for not offering a lifetime income option was lack of participant demand (60%), administrative complexity (49%) and fiduciary risk (34%). Executives could offer more than one reason.

In the AllianceBernstein surveys, 16% of plan executives said adding a guaranteed-income target-date fund would be one of the changes they would make in the next two years.

The Towers Watson survey said only 6% of DC plans now offer a guaranteed lifetime income distribution in their DC plans. Usage isn't very strong: Four-fifths of these plans report that fewer than 5% of participants choose this option.

The Towers Watson online survey was based on responses from 371 401(k) executives in plans with more than $10 million in assets and more than 1,000 employees.