Workers Look on Retirement Plans As Major Income Source

December 18, 2003 (PLANSPONSOR.com) - Six in 10 American workers look on their defined contribution workplace retirement savings programs as their largest source of retirement income, a new survey found.

In fact, workers polled by Prudential Financial said their employer retirement plans will end up contributing twice as much to their retirement income as Social Security – with retirement plans making up an average 54% of the total and Social Security 26%.

“Our parent’s generation relied on Social Security and traditional defined benefit pension plans for retirement income, while today’s workers participate and save in employer-sponsored defined contribution plans to secure their retirement income”, said Scott Sleyster, president, Prudential Retirement, in a statement.

Despite the fact that workers put so much importance on employer-sponsored retirement plans, many workers aren’t properly keeping track of their plan investments or actively tending to their portfolio diversification. For example, despite the Iraq war, the market downturn, and historically low interest rates – all factors that could potentially affect investing decisions – nearly seven in 10 employees haven’t touched their asset allocations in the last 12 months, the survey found.

Making Investment Decisions

Generally, about half of the participants’ investment decisions seem to be advice- or research-based. Some 30% said they followed professional advisors’ recommendations, and 21% said they conducted their own research.

But the remaining half of participants are apparently on shakier ground when it comes to decisionmaking:

  • 14% picked investments with the best performance at the time
  • 11% listened to their co-workers or friends’ suggestions
  • 9% simply divided money among a number of options
  • 8% took their best guess.

Also, at a time when many plan sponsors are trying hard to offer as many investment options as they can, the Prudential survey found that participants tend to put their plan assets in a small number of offerings

The majority (75%) said they use four or fewer investment options or are unsure how many options they use. Prudential said the finding suggests a potentially significant underutilization of their investment choices and raises questions about whether participants’ portfolios are adequately diversified.   Particularly troubling, Prudential said, was that 27% use only one to two investment options. Even among employees age 50 to 64, the same amount (27%) use one to two investment options. Some 19% can’t even remember how many options they use.

Finally, almost six in 10 American workers do not feel they are saving as much as they should. Workers were three times more likely to increase (27%) their retirement plan contributions to make up for stock market declines and savings needs than to decrease contributions (9%). Since only 31% report contributing the maximum allowed to company plans, many other have the opportunity to also boost their savings.   However, the majority (62%) still contributes the same percentage of their salary as in prior years.

Prudential Financial’s Annual Retirement Perceptions Study polled 1,000 Americans in July and August 2003. The study’s participants are a national representative random sample of full-time employed men and women aged 21 to 64 who currently participate in 401(k), 403(b), 457, or other types of plans offered by their employers.

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