… but lack of education creates missed opportunities
NEW YORK, N.Y., April 16, 2015 — The Guardian Insurance & Annuity Company, Inc.® (GIAC), a wholly-owned subsidiary of The Guardian Life Insurance Company of America® (Guardian), today released the results of a comprehensive national survey revealing that while plan participants are satisfied with their 401(k)s, a lack of understanding of basic investment concepts likely contributes to lower plan engagement and less successful retirement outcomes.
The Guardian Small Plan 401(k) RetireWell Study SM2.0: What’s Working and Not Working for Small Plan Participants (the Study) reveals that there is a general lack of understanding of some basic investment terms. When asked which terms they had heard of in connection with their 401(k), the results were mixed:
- Fifty percent said they had heard of target date funds
- 45 percent had heard of dollar cost averaging and
- 39 percent were familiar with target risk funds
Familiarity vs. Comprehension
While being familiar with a term is one thing, comprehension is another. Two-thirds of participants who have heard of target date or target risk funds assert they do not understand the term. Seventy-seven percent have heard of vesting but fewer than half assert that they understand the term completely.
Plan participants need a better grasp of basic retirement planning terms to truly understand how 401(k)s work and how they can be engineered to meet their financial goals and optimize their contributions. This is particularly important as 401(k)s and other defined contribution plans are by far the largest anticipated source of retirement income for plan participants. In fact, 77 percent of survey respondents expect it to be their most important source of income in retirement.
This is the primary vehicle they use to fund their retirement and it’s the primary vehicle they plan on drawing from to provide income in retirement. Personal savings is viewed as the third largest source of income with Social Security ranked second.
An under-utilized strategy
Additionally, while plan participants place the 401(k) on a pedestal, it still remains underutilized. The average 401(k) participant under 50 contributes $8,700 per year to his or her account; for those 50 or over the average is $9,100. In both cases this equates to a median deferral rate of nine percent of personal income, certainly less than most financial professionals recommend to build a secure retirement income.
On top of not investing enough, the study shows that most individuals are unprepared to make decisions or take action to optimize their 401(k) plans and are leaving tax-efficiency on the table. One-third of all 401(k) participants chose to leave their 401(k) accounts completely untouched within the past year, meaning few increased their contribution.
This is where proper education and guidance can influence how plan participants engage with their retirement plans. “The RetireWell Study magnifies the importance and expectations plan participants place on their defined contribution plans,” said Douglas Dubitsky, Vice President of Guardian Retirement Solutions™. “However, our research also shows that most individuals are unprepared to make decisions or take action to optimize their 401(k) plans.
This is where education and support can make a significant difference in improving retirement outcomes.” The Study acknowledges that plan participants are fairly realistic about the connection between savings behavior today and retirement income tomorrow. However, plan participants are overly concerned with checking on their account balances and do not focus enough on how to convert their balance into income.
This directly influences their retirement outlook; 50 percent are only somewhat confident that they will hit their target retirement income. Further guidance and knowing how current contribution rates stack up against future income replacement would cause plan participants to set more money aside. “It’s certainly reasonable to speculate on the link between comprehension, clarity, and participant engagement,” stated Mr. Dubitsky.
“The simple conclusion is that the more participants know, the more they will save.”
Guardian Retirement Solutions™ enlisted the assistance of Brightwork Partners, LLC to conduct this nationally-representative, quantitative 25-minute online survey of 2,000 active 401(k) participants in November 2014. To obtain a copy of The Small Plan 401(k) RetireWell Study SM: What’s Working and Not Working for Small Plan Participants results, please visit: http://www.guardianlife.com/401kRetireWell.
The Guardian Life Insurance Company of America® (Guardian) is one of the largest mutual life insurers with $6.8 billion in capital and $1.3 billion in operating income in 2014. Founded in 1860, the company has paid dividends to policyholders every year since 1868. Its offerings range from life insurance, disability income insurance, annuities and investments for individuals to workplace benefits, such as dental, vision, and 401(k) plans for businesses.
The company has approximately 5,000 employees and a network of over 3,000 financial representatives in more than 70 agencies nationwide. For more information about Guardian, please visit www.GuardianLife.com. Guardian Retirement Solutions™ refers to the administrative support services, including participant recordkeeping as well as marketing, enrollment and educational materials, provided by GIAC in conjunction with the individual and group retirement products issued by GIAC. For more information about Guardian Retirement Solutions, please visit 401k.GuardianLife.com.