Participants (Still) Clueless on Investments

The national survey, the seventh since 1991, finds that while participant account balances have grown, it is more likely the result of a generous market than informed investment choices.

The survey found:

• nearly 20 % don’t know they can lose money in stocks
• over half (60%) think they cannot lose money in a government bond fund
• nearly two-thirds (65%) don’t know they can lose money in a bond fund
• 80% don’t know the best time to invest in a bond fund (for our money, this is a “hard” one – it’s when interest rates are expected to decrease, according to Hancock)
• nearly half (44%) think money market funds include stocks and a like number (43%) think they also include bonds

Respondents also consider company stock less risky than a diversified domestic equity portfolio – but that may be because it is also the investment option they say they are most familiar with.

Irrational Exuberance?

Despite their apparent lack of knowledge and planning, respondents remain surprisingly confident about retirement:

• nearly two-thirds of respondents expect to retire early, before age 65
• just 15% say they are very concerned that they won’t have enough to live comfortably in retirement, while nearly half (42%) are not at all concerned

On the other hand, only 8% expect to retire before age 55, the lowest level since 1995 according to John Hancock.

In terms of planning:

• 50% of respondents spend 6 hours or less per year monitoring their portfolio
• just 50% have determined how much money they will need for a financially secure retirement
• only 50% have an asset allocation plan and just one-third of this group is doing anything to maintain the appropriate mix

Nearly half (40%) say they don’t know what to expect for average annual returns for stocks, bonds, money market and stable value investments during the next five and twenty years. Still, on average the 60% who offered a notion were “irrationally exuberant.” According to survey respondents the projected annual average return per asset class over the next 5 years was:

• Stocks – 13.6% annual over the next 5 years
• Bonds – 10.1% annual return over the next 5 years
• Money Market Funds – 9.9%
• Stable Value Option – 9.3%

Savings Rate

Participants are saving an average of 9% of their pay, on average, the same as 1999. However, less than a third (31%) contribute the maximum allowed under the plan.

Participant balances for retirement and emergencies have increased since the last survey.

About half of those who invest in stocks say that they would change their strategy after a 20% market drop, while three-fourths would do so after a 30% decline in value.

A comparatively small 21% consider themselves to be relatively knowledgeable investors, either a “4” or “5” on a 5-point scale. Forty percent ranked their knowledge as a “1” or “2”.

No Time

While a majority (70%) has access to employer-provided financial planning and investment advice, less than half have taken advantage – even when the advice was free. Of those who haven’t:

• 40% say they don’t need assistance
• 11% have no time
• 7% are just too lazy

Mathew Greenwald Associates conducted the survey of 800 defined contribution plan participants.