DC Plan Investors Allocating to Cash Because of ‘Fear’

Retirement plan participants are confused about their investments and where to allocate assets.  

Figuring out how to invest their defined contribution assets is driving DC plan participants to invest emotionally to withstand their worst fears, 2024 data from Schroders suggests.

More than one-quarter (28%) of defined contribution plan participants reveal they are oblivious to how their retirement assets are invested, finds the Schroders 2024 U.S. Retirement Survey.

Among participants who do know where their assets are allocated, investing across workplace plans, IRAs and other retirement accounts the research suggests they are investing emotionally, states Deb Boyden, head of U.S. defined contribution at Schroders, in a press release.

Retirement participant’s fear allocation may keep investors from participating in equity market upturns and periods of asset growth, states Boyden.

“Fear can hold us back in many different aspects of life—including retirement planning,” she said, in a press release. “For savers with long-term horizons, large cash allocations create an opportunity cost that prevents you from taking advantage of the powerful benefits of compound growth.”

“To mitigate ‘fear allocation’ tendencies,” says Boyden in response to a question from PLANSPONSOR, “plan sponsors can offer smarter, professionally managed solutions designed specifically for participants approaching or in retirement.”

She said such offerings would help to “transfer the responsibility of asset allocation from participants to investment professionals who manage portfolios daily.”

Participants benefit from “in-plan products that handle asset allocation, … reducing the anxiety and potential missteps associated with self-directed investing, which as our survey has found, typically includes an overallocation to cash. “

Plan participants who currently participate in a workplace retirement plan allocate their portfolios in the following proportions, according to Schroeder’s data:

• Equities, 29%
• Cash, 28%
• Fixed income, 19%
• Target-date funds, 16%; and
• Other, 8%

Fear was the most common reason for holding cash, the survey found. Two-thirds of plan participants allocated to cash because they fear losing their assets if the stock market slumps and 24% said they are unsure how to invest cash.

Seventy percent of DC plan participants said their workplace plan is their single most important retirement asset, 59% wanted more guidance from their employer on how to invest plan assets and 42% are working with a financial adviser, the survey finds.

Plan Participants Are Losing Sleep

Plan sponsors have opportunities to assist DC plan participants because of their fears, Schroeders’ survey finds.

Although approximately half (49%) of plan participants say the value of their retirement assets increased in 2023, 40% reveal they are not aware of how to protect the gains, 60% of participants feel they worry excessively about money and 39% have lost sleep because of worrying about their finances.

“There is a clear and present need for innovative retirement savings solutions that offer workers greater certainty and less volatility,” added Boyden. “With people living longer and the safety net of corporate pension plans gone for so many, investors need solutions that provide an opportunity to grow their assets and mitigate losses in the event of a downturn.”

The Schroders 2024 U.S. Retirement Survey was conducted by 8 Acre Perspective among 2,000 U.S. investors nationwide ages 28 to 79 years old, including 780 Americans who currently participate in a workplace retirement plan. The survey was conducted from March 15 to April 5, 2024.