Participant Expectations Gain Grounding – Somewhat

According to the Vanguard Participant Monitor, participants are looking for annual returns of 6% in the short-term from stocks.  However, they are still expecting a 15% return in the long-term, which would be something of a stretch based on long-term trends for the stock market.

However, while half of the respondents said stocks should produce 10% annual gains, nearly a quarter of so-called ‘hyperoptimists’ said the stock market would rack up powerful gains of 30% to 100%  – and another 27% couldn’t – or wouldn’t – estimate the returns at all.

“One half of the participant population has been the beneficiary of ongoing education efforts by plan providers and sponsors, and so has realistic market expectations,” explained F. William McNabb, Managing Director, Vanguard Institutional Investor Group.

“But, for the other half of the population, sponsors and providers need to redouble their efforts and target education programs at two types of participants — very inexperienced investors and those with extremely optimistic views about the future.’

Myopic Matters?

Plan sponsors should also note two other areas of participant investor ‘myopia’ – a lack of understanding on how bonds and bond funds work, and the ‘halo’ effect of company stock as an investment.

A relatively high percentage (33%-39%) of survey respondents were unable to provide expected returns for bond or money market funds.  Those who were able to hazard a guess projected short-term gains of 5% on bonds and 10% for the longer term, both dubious assumptions according to Vanguard.  They also ranked bond funds as less risky than money market fund offerings.

Plan sponsors may also be surprised to discover that, Enron publicity notwithstanding, participants rated company stock as less risky than stock mutual funds as an investment.  They did, however, draw a distinction between company stock and ‘individual stocks”, which were ranked a notably higher risk than either company stock or stock mutual funds.

Further Findings

Other key findings of the Vanguard survey include:

• Plan participants report saving 8% of their salary in their employer retirement plan, and 12% report that they increased their savings in the past six months.
• Nearly a third say they are saving at the maximum rate allowed by the plan.
• Just 15% made a change in their contribution allocation, an exchange, or both during the past six months, citing improved performance and diversification as the rationale.
• 85% of plan participants describe themselves as inexperienced investors with little understanding of risk and 45% consider themselves as conservative investors.

The Vanguard survey was conducted in October and November 2001 of 500 participants.

Vanguard serves 15 million shareholder accounts and manages nearly $580 billion in US assets, including more than $160 billion in participant-directed defined contribution retirement plans.