The eighth annual John Hancock Financial Services Retirement Survey of defined contribution plan participants showed that many have a cockeyed view of how investments work across the board. In fact, blind spots run the gamut – from a lack of appreciation for the volatility of a company stock investment to a poor sense of timing on bond fund investments to the composition of a money market fund.
That’s why John Hancock researchers said most participants would fall well shy of the estimated 75% of pre-retirement income needed to maintain the same lifestyle while in retirement.
More than 75% of participants surveyed have not rebalanced their portfolios in the past year and yet more than half say they don’t have the right balance between stocks and fixed income, according to the survey.
Level of Investing Information Still Lacking
A lack of investment knowledge may be contributing to the inertia, and inaccurate/inadequate perceptions about a number of typical 401(k) plan investment options are readily apparent, researchers say.
- Respondents said they were most familiar with company stock as an investment among all categories, increasing slightly from last year’s survey. However, despite Enron-esque headlines, survey respondents still rated the investment as the lowest risk investment of all equity-related choices.
- On the other hand, participants were least familiar with balanced and lifestyle funds – both of which are particularly well-suited for investors with limited knowledge of the financial markets.
- Second only to company stock, participant respondents said they were almost as familiar with money market investments. However, 40% said they believe the funds include stocks, while 47% said the funds contain a bond investment. Just 8% of respondents said correctly that money market funds contain only short-term securities.
The nature of bond funds appears to a perennial “black hole” of participant ignorance in the survey. Specifically, participants apparently don’t yet understand that bond funds are most desirable in a down interest-rate market with nearly one third of respondents saying that increasing rates is the best time for bonds. Only 23% of 2002 respondents got the bond fund question right.
Some 18% said the direction of interest rates didn’t matter – up significantly from 12% the year before. Nearly a quarter, 23%, said they didn’t know.
Asked for their estimates about how much of an investment return they expect from the major asset classes, four in ten respondents didn’t provide any estimates. However, those claiming to be relatively knowledgeable tended to be more optimistic about the prospects for stock returns – and more conservative about bond investments – than other survey respondents.
Most telling about participants’ view of investment risk is their continuing sense that company stock is the least risky of all the equity investments commonly found in 401(k) plans – more than other domestic stocks and international/global equities.
Respondents also inaccurately rank money market funds as riskier than domestic bond funds and government bond funds as less risky than either. Although most respondents correctly stated that one could lose money in a stock fund, the answers were less on the mark when it came to bond and stable value funds.
Nearly 40% said investors couldn’t lose money in a bond fund and nearly 66% didn’t acknowledge a potential money loss from a government bond fund.
Putting Money Where Your Mouth Is
A growing confidence in stocks has produced a dramatic increase in the number of respondents selecting stock fund investments – up more than 30% to 77% from 1992 to 2002. However, the amount of company stock invested dropped during period from four in ten to 31%.
Stable value investments also dropped during the 1992 to 2002 period from 47% in 1992 to 25% in the latest survey.
The January 2002 survey covered 801 defined contribution participants and was conducted for John Hancock by Mathew Greenwald & Associates.
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