IMHO – Hooked on a Feeling?

Recent surveys suggest that participants are more confident about retirement finances - but are they OVER confident?

This week, plan sponsors were treated to the results of two different surveys that appeared to offer different perspectives on retirement confidence.  A brand new survey from Fidelity showed that nearly 80% of participant respondents were confident that they would have sufficient funds for retirement.  On the other hand, an annual survey from the Employee Benefit Research Institute (EBRI) showed that participant confidence had declined for the first time since 1995, although 63% were still confident in the final outcome.

Of course, when you take a deeper look, you find that the surveys are really based on very different premises.  The most notable from my standpoint is timing. EBRI’s results were based on phone interviews with participants in January and February.  On the other hand, Fidelity’s conclusions were culled from 400 participants who called Fidelity during the last week of April.  While we haven’t seen the particulars of the data, I think it is fair to draw the following inferences:

  • April was a relatively good month for the US stock markets (which underscores just how rough it has been).  All of the major indexes were up nearly 8% for the month, including the S&P 500, a widely-held 401(k) option.  Let’s face it, those 401(k) balances had to look better than they had in months – and that probably bred some good vibrations, lifting the spirits of Fidelity’s respondents.
  • The Fidelity participants are likely already actively engaged in their 401(k) account.  It has become a truism that the overwhelming majority of participants NEVER check out their balances, much less touch the accounts.  While the tally may reflect some who were making their once/year call, odds are that these were the ones who “get it” when it comes to thoughtfully planning their retirement.
  • As active participants, the Fidelity respondents were likely more confident than the population at large.  Numerous studies have verified that participants who have taken the time to sit down and figure out what they need to save for retirement are generally much more confident about their ability to achieve those goals.

So, all in all, one might understand if the Fidelity results yielded a rosier picture than the EBRI results, which were gathered over a broader, more random audience, and at a different time.

Consistent Confidence

But it would be short-sighted to ignore the fact that both studies continue to show a remarkably high confidence on the part of participants in their ability to be financially secure in retirement.  This confidence remains in spite of clear evidence that Social Security in its current form can’t sustain the Boomers, that pension plans continue to fade into oblivion, that personal savings rates are at historic lows and that the bull market that buoyed many a 401(k) balance can quickly adopt a bearish countenance.

According to most industry surveys the “average” 401(k) balance is somewhere between $40,000 to $50,000 – before last year’s market tumble.  It’s tricky to infer much from that number. After all, it encompasses a wide range of ages, incomes and personal situations (some people actually have rich uncles, you know).  But, while something is nearly always better than nothing, if you’re retiring in the next five years and only have $50,000 put aside – well, let’s just say you better not get sick.

These measures of “confidence” are interesting, but miss the point.  Ignorance really can be bliss, and most participants unfortunately remain ignorant of what they need to live on for 20-25 years in retirement.  Confidence is a feeling, and one not necessarily based on reality.  A point hammered home in our interview with EBRI President Dallas Salisbury this week, by the way.

It’s all well and good to feel good.  But participants may be looking at the prospects of retirement through rose-colored glasses. And plan sponsors shouldn’t let them get hooked on “feelings” that won’t feel very good once the realities of living in retirement settle in.

– Nevin Adams, Executive Editor           

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See also:

Participants Stick to Their Strategies  – the Fidelity Survey

EBRI: Uncertain Times Leave Participants Less Sure  – the EBRI survey