Spectrem: More Ed is Needed for Alt. Investments

March 1, 2006 (PLANSPONSOR.com) - While increasing numbers of plan sponsors have reached out for lifestyle and lifecycle funds as well as ETFs as investment options, that doesn't mean participants know that much about them.

In fact, according to a new Spectrem Group study, most 401(k) participants do not even know what the latest options are or how they might fit into their overall retirement savings accounts. A news release said, for example, that seven in ten participants can’t identify lifestyle funds even though just over four in 10 (41%) have them available. Similarly, 77% are unfamiliar with lifecycle/target data funds, while 67% say ETFs are still a mystery and 40% are clueless about real estate funds.

Plan sponsors have to do a much better job in orienting participants about the newer options, researchers asserted. “These offerings simply have not impressed plan participants,” said Catherine McBreen, Managing Director of Spectrem Group, in the news release. “These individuals continue to put most of their 401(k) money into well-trodden investment classes, most likely because they are not well-enough informed about the new options and how they might benefit their overall portfolios. If plan providers are serious about these new products, they will need to undertake a broad effort to educate their participant bases.”

In fact, according to a second Spectrem report, better educational programs for plan participants would be useful generally. Participants are making some potentially serious mistakes in their 401(k) and other defined contribution plans, such as 403(b) and 457 plans, the company said.

For example, the mean deferral rate for participants with incomes below $50,000 a year is 5.4%, compared to 8.6% for those earning $100,000. Asserted the researchers: “This could put participants with income below $50,000 at a

significant risk of being unprepared for retirement.”.

The report Participant Usage and Demand for Alternative Investment Funds is based on data from interviews with 401, defined contribution plan participants in September and October of 2005. The report, Defined Contribution Participant Profile & Analysis 2005 is based on 2,410 interviews with plan participants conducted throughout 2005. More information is available at 312-382-8284 or at http://www.spectrem.com .