"In today’s economy, plan participants’ confidence that they will have accumulated enough money to retire comfortably is low and declining rapidly," said Kristi Mitchem, head of BGI’s U.S. Defined Contribution business. "While the loss of 401(k) plan savings has weakened the confidence of plan participants, retirement savers are not abandoning their plans, but are changing their ideas about what they want their plans to provide."
Retirement Income Ranks Equally Important with Health Care Coverage
When asked how to improve their retirement confidence, 73 percent ranked guaranteed income in retirement (other than Social Security) as "very important". That desire increased to 83 percent for those worried they will never retire. Notably, participants ranked guaranteed income equally with "knowing my health care costs would be covered" as a way to improve confidence.
Mitchem says, "The fact that participants ranked retirement income equally with health care is remarkable, and frankly somewhat surprising. Health care costs are recognizably top of mind for millions of Americans and a priority for our government, yet retirement income receives little attention when it comes to 401(k) investors. This survey indicates the current economic crisis has amplified both the awareness of, and desire for, retirement income for 401(k) participants."
This is further emphasized by the fact that only 13 percent feel Social Security will provide sufficient guaranteed monthly income in retirement, while 90 percent said they would be interested in a 401(k) option that would allow them to secure guaranteed monthly income.
Retirement Confidence Influences Attitudes and Behaviors
Participants report they feel the impact of declining retirement confidence in many ways. For example, one-third (33 percent) of plan participants admitted the current economic climate is causing them to delay viewing their account statements. This percentage increases among those who are unsure if they will be able to retire as planned (41 percent) and is highest (46 percent) among those who are worried they will never be able to retire.
"Unfortunately, the ‘no news is good news’ approach to retirement savings isn’t the best option. A lack of communication tends to significantly raise fear, which, in turn, clouds good judgment and can cause paralysis," Mitchem said. "An account statement is a very important communication tool for guiding participants toward retirement. Everyone needs that information, and those who may need guidance the most are shutting down an important avenue of communication."
One-Two Punch: Confidence Down, Losses Real
Confidence levels significantly influence how participants feel they will recover from their losses. While almost half of participants (45 percent) said they would "save more" to make up for their losses, that decreased to nearly one-fourth for those who have a low confidence level. The survey also showed that participants are more likely to increase than decrease their contributions, and, despite steep market losses, only 4 percent of participants indicated they will stop contributions altogether. Overall, half of participants said they will not make any changes in the next 12 months.
Mitchem says, "What’s been particularly challenging with the market downturn is the frenzy over investment returns when the real key to a successful 401(k) is sufficient savings rates. Participants say they will save more now, but we know that unless we nudge them, they will join the majority who do nothing. This is why automatic savings features are vital to helping participants help themselves."
Confidence in the health of the economy also showed itself when nearly two-thirds of participants indicated that in the next 12 months it would be more likely that there would be a cure for the common cold than a full economic recovery.
A Clear Desire for Retirement Income
Nearly half (49 percent) of participants said their employer could improve their 401(k) plan by providing a choice for securing guaranteed income in retirement. That increased to 61 percent for those participants who are worried they may never be able to retire.
The current economic downturn has helped plan participants shift away from thinking about their plan assets in terms of a lump sum and more toward how these assets can provide income throughout retirement. "We found that participants are putting a greater emphasis on the monthly income that their savings will generate. The current economic downturn has focused participants’ attention on financial stability in the form of guaranteed income," Mitchem said. "With the burden of retirement savings landing largely on the shoulders of individuals, it is crucial that plan sponsors provide participants with the tools to lighten that load."
401(k) Plans Resilient and Requiring Reform
Weakened confidence also affects how participants view their 401(k) plan as an employee benefit. Overall, nearly half of all 401(k) participants (46 percent), regardless of their confidence level, feel their 401(k) plan has become more important to them during the current economic turmoil. This percentage declines to 21 percent among those worried they may never be able to retire.
The survey results send a signal to policy makers to bring income into the 401(k) discussion and suggest changes plan sponsors can make to restore the confidence of their participants in the face of an unstable economic future.
"We believe 401(k) plans have been hit hard, but not knocked down. Through public policy and advancement of plan offerings, we can strengthen retirement outcomes for millions of Americans," said Mitchem.
This BGI-sponsored study sampled 1,000 401(k) participants via an internet panel questionnaire and was designed to tap into participants’ perceptions about the ongoing economic downturn, its impact on retirement confidence, and how retirement confidence is influencing attitudes and behaviors of defined contribution plan participants.
