Data and Research April 26, 2016

Fewer Retirees Enjoying Their Golden Years

The decrease in “very satisfied” retirees spans all economic groups, a study finds.
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Retirees are increasingly dissatisfied with their retirements, according to a new report from the Employee Benefit Research Institute titled “Trends in Retirement Satisfaction in the United States: Fewer Having a Great Time.” Data gathered from 1998 to 2012 through the University of Michigan’s Health and Retirement Study (HRS) shows that fewer Americans say they are “very satisfied” with retirement, while a growing number of retirees say they are “not at all satisfied.”

“The drop in ‘very satisfied’ retirees is not limited to any particular economic group. This is clearly a more general trend,” says Sudipto Banerjee, EBRI research associate and author of the study. “What’s not yet clear is exactly why this is happening.”

EBRI’s study finds that the share of HRS survey respondents reporting “very satisfying” retirements dropped from 60.5% in 1998 to 48.6% in 2012. Conversely, the number of respondents reporting “moderately satisfying” and “not at all satisfying” retirements increased from 31.7% to 40.9% and from 7.9% to 10.5%, respectively. The levels of high satisfaction in retirement started to drop in 2004, according to HRS’s data.

In general, more respondents with pension annuities found retirement “very satisfying” both at the beginning and end of the 1998 to 2012 period, but their shifts away from the response of “very satisfying” and toward the response of “moderately satisfying” over the period have been very similar, EBRI’s report says. EBRI notes that both the highest- and lowest-asset quartiles show similar trends, indicating that their retirement satisfaction isn’t just based on their level of assets or whether they have pension income. There is no significant difference in retirement satisfaction levels between men and women. In contrast to the findings of earlier studies, this study shows that the share of people with “very satisfying” retirement drops with age.

Banerjee notes that net worth and health continue to be strongly correlated with retirement satisfaction: Higher net worth is associated with higher levels of satisfaction, and poorer health is associated with lower levels of satisfaction.

Full results of the study are available here.

Investing April 26, 2016

Investment Fees Lower in 2015

The asset-weighted average net expense ratio of all U.S. funds was 0.61% in 2015, down from 0.64% in 2014 and 0.73% five years ago, according to Morningstar data.
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On average, U.S. investors paid lower fund expenses in 2015 than ever before, as assets continue to flow into lower-cost index mutual funds, exchange-traded funds (ETFs), and institutional share classes, Morningstar reports.

The asset-weighted average net expense ratio of all U.S. funds was 0.61% in 2015, down from 0.64% in 2014 and 0.73% five years ago. The decline was primarily driven by asset flows into lower-priced vehicles—namely, passive funds and less-expensive share classes—and not by fee cuts in the asset management industry, Morningstar notes. From 2013 to 2015, the simple-average expense ratio of the largest 1,000 share classes, which accounts for 75% of assets in mutual funds and ETFs, remained 0.64%.

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The least-expensive funds—those with fees that fall in the lowest quintile—collected $1.7 trillion in flows during the past five years, while the remaining funds have seen outflows of $372 billion. On average, passive funds, including index funds and ETFs, accounted for approximately 75% of flows into the least-expensive funds in that time period.

In 2015, the asset-weighted expense ratio was 0.18% for passive funds, compared with 0.78% for active funds, a difference of 60 basis points. With such a large fee gap, rising flows into passive funds contributed to falling asset-weighted average expense ratios.

Although active funds outnumber passive funds eight to one, passive funds gathered $576 billion more in assets than active funds in 2015. That represents a sharp increase from 2011, when passive funds took in $140 billion more than active funds.

The largest flows to passive funds—and out of active funds—occurred in the Morningstar U.S. equity category group, where passive funds experienced $471 billion of inflows and active funds saw $572 billion of outflows during the past five years. The 67-basis-point fee gap between U.S. equity active funds and passive funds is the largest among the seven major asset class groups.

“Fees in the asset management industry are coming under increasing scrutiny, and this trend has driven investment dollars into lower-cost funds, particularly index funds,” says Patricia Oey, senior manager research analyst for Morningstar. “While certainly a positive trend, it’s worth remembering that fund expenses are not the whole story, as investors often pay additional fees on retirement platforms and for advice.”

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