Are Participants Overconfident About Their Investments?

A national survey by Wells Fargo & Company’s employee benefits consulting group, Bryan, Pendleton, Swats & McAllister, LLC (BPS&M) indicates that four out of five participants (80 percent) believe their investments are well-diversified, but   Wells Fargo’s analysis of the actual investments of 401(k) participants shows that only about half that level (42%) actually meet a minimum level of diversification.   Of course, that confidence may be a bit dented at the moment – the survey was conduced last August.

As for how participants evaluate that performance, the survey’s authors say that the most common selection for how participants evaluate their investment performance: “If I make money, it’s good. If I lose money, it’s bad.”

The 2008 Individual Retirement Planning Behaviors and Attitudes Survey from BPS&M focuses on the three behaviors required to prepare for retirement:

• plan participation,
• adequate contributions and
• investment diversification.  

Participation Drivers

Survey respondents say participation in a plan is often driven by feeling the need to save in order to retire comfortably, followed by matching contributions and tax advantages. The most common reason employees don’t participate; they cannot afford to have more money come out of their paycheck.   And, indeed, only 12% of these respondents had household incomes greater than $100,000.   

Most participants surveyed view automatic enrollment positively, with 60% agreeing that employers have a responsibility to automatically enroll employees in the retirement plan.

Most respondents understand the need to save, but they want and need more education from employers on how to determine an appropriate savings rate. In fact, a third of employees wouldn’t even venture a guess about how much they need to save each year to have enough income during retirement. Of those who did, many employees had high estimates of how much they need to save each year to have a comfortable retirement, with the mean estimate being 19% of their income saved annually, through both their own contributions and those of their employer.

Most say they would sign up for a program that automatically increases their contribution rate a little bit each year, though the actual adoption rate for such programs has traditionally tracked well below that level of acceptance.

Survey results can be obtained by contacting BPS&M at 615-665-5335 or BPSMsurvey@wellsfargo.com .