Asset AllocationJanuary 16, 2014

Ignorance is Bliss? A 2013 DC Investor Survey

401(k) plan members are optimistic about their investments, according to State Street data, but not entirely sure what some of their investments do.

Reported by Featured Author

(January 15, 2014) – Saving for retirement is like a Ferris wheel, with ups and downs, according to half of the defined contribution (DC) plan members surveyed by State Street Global Advisors (SSgA).

That’s a positive response, the survey report said, suggesting that the dramatic market movements of the last five years taught investors to expect volatility. Still, expecting volatility did not mean respondents were comfortable with it.

“There is an argument that since the risk premia on equities are expected to be greater than fixed income, DC portfolios should be 100% stocks while retirement is a long way off,” said Nigel Aston, SSgA’s head of DC in the UK, while discussing the results in New York. “But what we’ve found is that people want stability.”

The survey of 1,021 confirmed DC participants showed optimism, with 78% anticipating markets five years from now would be similar to or stronger than today’s.

But despite their relatively positive outlooks, DC scheme members were attracted to less risky strategies than in previous years. Roughly half of respondents said they invest at least somewhat more conservatively since the recession, while just 7% reported becoming more aggressive.

“Plan participants are becoming increasingly conservative with a preference for fixed income without a solid understanding of its role in their portfolio,” SSgA’s report noted.

Only half of those surveyed on the features of bonds chose “lower risk than stocks,” and 70% said they reduced volatility. More than a third answered that fixed income “helps minimize the impact of inflation”—nearly the same portion (40%) as stated that bonds better diversify a portfolio.

Furthermore, the respondents to these biannual surveys tend to skew to higher education and income levels than the general membership base, according to SSgA’s Global Head of DC Fredrik Axsater.

He and his colleague Aston recommended plan sponsors educate members on age-appropriate asset allocation and, more importantly, do their best to ensure members receive it.

“Globally, across every survey that we do, DC plan participants say over and over again that they welcome automaticity and guidance,” Axsater said.