Participants Still Need Basic Retirement Plan Education

In a June 12, 2014, PLANSPONSOR.com article – They write that 401(k) plan participants still do not understand some of the basics about saving and investing in their plans as suggested by an recent survey.  The survey is authored by MFS Investment Management.  Complete article linked here.

 

http://www.plansponsor.com/NewsStory.aspx?id=6442498306

 According to MFS Investment Management’s (MFS) 2014 DC Pulse survey, nearly three-quarters (74%) of participants say having a little bit invested in each option of a 401(k) plan is the best way to diversify.  More than 20% say they have no idea how best to diversify a retirement account.  

More than half (52%) of 401(k) participants are not aware of the tax impact on take-home pay from a contribution of $100, and nearly half (46%) say they believe the money saved in their retirement plans is a good source of funding for other financial needs, like paying off debt or saving for college.

The survey finds participants often contribute just enough to receive the maximum employer match, and nearly one-quarter (23%) of plan participants surveyed indicate they believe there is no additional benefit to contributing more than is necessary to receive the employer matching contribution. The number jumps to 37% among Generation Y respondents (younger than age 34).

More than one-third (37%) of survey respondents say a major drop in the stock market poses the greatest risk to their retirement savings—not contribution amounts or behaviors. Only 8% base plan contributions on projected retirement needs and goals, while 46% contribute what they feel they can currently afford. Only 17% believe the amount of time they are invested has the greatest favorable impact on their retirement account balance, and just one in four know early withdrawals may lead to tax penalties.

65% of survey respondents incorrectly believe index funds are safer than the overall stock market, and nearly half (49%) believe index funds have better returns than the stock market.

These statistics are startling, albeit not surprising to many industry practitioners.  I believe this makes a clear case for an option within the system engineered to do everything for the participant (not target date funds).  Automate an appropriate savings rate, escalate that rate over time, professionally asset allocate and asset select for the participant, adjust as needed and define an endpoint retirement age that will be the target.  This system should be the prevailing system, just a thought.

 

The Passive vs. Active Debate

Earlier this month, the good folks at Knowledge Wharton published an article on their website entitled 'If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?', linked here --> http://knowledge.wharton.upenn.edu/article.cfm?articleid=2702

While, we at this blog, don't have a strong opinion on the passive vs. active debate, the article does go through a somewhat balanced excercise of the pros and cons of each. That said, while it touches upon this a little in the beginning of the article, I don't think they are giving enough credit to one very important reason why Active management outsells passive to the degree it does.

In this author's opinion, the real reason is the distribution system. Having spent quite a few years employed to distribute actively managed mutual funds, I can tell you first hand that the distribution machine to sell active management is huge and filled with very effective sales professionals. Despite the quantitative data put forth in the article, active management will continue to outsell passive as long as they build in distribution fees (12b-1s) to pay the distributors.....registered reps.

Either way, I think the article is a good read. Thanks Wharton.