Data and Research December 15, 2014

Investors Want Some Control in Saving for Retirement

More investors surveyed prefer a 401(k) over a pension, and they do not want to give up control of all retirement savings actions.
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Asked whether they prefer a “a 401(k)-type plan that you control and invest in, and which the company may contribute to, with the payout dependent on your plan’s performance” or “a company pension plan that provides you with a guaranteed income in retirement, with the payout dependent on your salary and how long you worked for your employer,” 52% of not-yet-retired investors chose the 401(k), versus 46% who chose the pension.

According to the Wells Fargo/Gallup Investor and Retirement Optimism Index for the fourth quarter, 69% of working investors have access to an employer-sponsored 401(k) plan, and 96% of those with access are actively contributing to their plans. Eighty-six percent say their employer matches some part of their contributions, and 81% say this is “very important” in helping them save for retirement.

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While three-quarters would be in favor of a new employer automatically enrolling them in a 401(k) plan at the start of their employment, and 66% would want their employer setting up automatic increases for their contributions, fewer than half would favor their employer automatically rebalancing their investments each year (44%) or automatically making age-appropriate investment choices for them (41%).

Most employed investors with a 401(k) plan rely on advice for using the plan effectively, but they are commonly finding it from outside sources. About one in four (27%) say they rely on a professional adviser outside of work, and another 39% rely mainly on themselves or a friend or family member for help. Just 22% say most of their advice comes from the financial firm that runs their 401(k) plan, and 11% say they seek advice from their company’s benefits department or another financial professional where they work.

“People seek advice about their 401(k), and the industry needs to make it easier for participants to access advice. Investors rely on these plans and want to talk to people who can help them understand a proper savings rate, investment diversification, and concepts like longevity risk and income management. We have to be much more proactive as an industry in helping them make the right choices for their future,” says Joe Ready, director of Wells Fargo Institutional Retirement and Trust.

Employed investors say that after health care benefits, a retirement savings plan such as a 401(k) is the most important benefit their employer provides (61%), exceeding paid time off or sick leave (23%), life insurance (5%) and stock options (4%).

About one-third (32%) of investors says they have increased their savings for retirement in the last 12 months, while about two-thirds have not. At the same time, 9% of working investors—including 14% of those ages 18 to 39—are not saving for retirement.

While about one-quarter of working investors say they could not possibly save any more each month, 69% believe they could save more. Among this group, the median additional amount they estimate they could save each month is $250, with 31% estimating they could save an additional $400 or more each month.

Among those who are working and saving, the average age they started saving is 29. Four in 10 (45%) started saving at age 30 or older. A majority (80%) of investors say Americans’ inadequate retirement savings comes down to “delaying” the process of saving for retirement and having a hard time paying the day-to-day bills.

In addition, many investors are clearly counting on Social Security to supplement their personal savings and investments in retirement. When asked if they would be motivated to save more if they knew they would not receive Social Security money when they retire, more than half (54%) say they would be motivated to save either “a lot more” or “a little more.” Just 44% say that scenario would not make a difference in how much they save.

A lack of savings cannot necessarily be pinned on people taking out loans or withdrawals from their 401(k) plans. Relatively few workers who participate in their employer’s 401(k) report that in the past five years they have taken out a 401(k) loan (16%). Even fewer, 9%, have taken an early withdrawal from the plan. However, 21% of investors with a 401(k) have done at least one of these things, including 5% who have done both.

More than three-quarters of those polled (78%) currently own stocks, versus 22% who do not. A little more than half (56%) of investors say that “now is a good time to invest” in the financial markets, up from 52% at the start of 2014. As recently as November 2012, the majority of investors said it was not a good time to invest. Notably, all of this quarter’s heightened confidence in the markets comes from retirees, 54% of whom say it’s a good time to invest in the markets, up from 44% last quarter. Working investors’ views virtually didn’t change, with 56% in the fourth quarter saying it is a good time to invest.

In a separate question, a minority (45%) of investors rate the financial markets as an “excellent” or “good” way for average Americans to grow their assets, although this is an increase from 37% a year ago. A majority (55%) still rate the markets as “only fair” (38%) or “poor” (17%) for the average American.

The Wells Fargo-Gallup Investor and Retirement Optimism Index is based on a survey conducted November 14 through 23 by telephone, among 1,009 investors randomly selected from across the country. For this study, the American investor is defined as an adult in a household with total savings and investments of $10,000 or more. About two in five American households have at least $10,000 in savings and investments. The sample size is comprised of 71% working and 29% retired investors. Of total respondents, 60% had reported annual income of less than $90,000 and 40% of $90,000 or more.

Administration December 15, 2014

DC Plan Use of Company Stock More Restricted

The offering of company stock in defined contribution plans has declined since 2005, according to Vanguard.
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Fewer retirement plans offer employer stock and fewer plan participants hold concentrated company stock positions in their retirement savings accounts, finds a new analysis from Vanguard.

Many companies that still offer company stock in 401(k)s or other defined contribution (DC) plans now impose restrictions on the option, Vanguard notes in “Company stock in defined contribution plans: An update.” 

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Vanguard presents its analysis as an update of prior research on the changing nature of company stock in employer-sponsored retirement plans. For the research, Vanguard aggregated participant-level account balances so as to more accurately quantify the effect of company stock on the participant’s entire DC account wealth with their current plan sponsor.

This is necessary because many large employers, who are more likely to offer company stock, are also more likely to sponsor multiple DC plans. While participants at one company might have a 401(k) account with no company stock and a stand-alone ESOP, another company may offer participants a 401(k)/ESOP plan with company stock and a stand-alone profit-sharing plan with no company stock.

Accounting for this complexity, Vanguard finds the fraction of plan sponsors offering company stock experienced a 27% relative decline between December 2005 and June 2014. As the researchers note, the fraction of participants offered or investing in company stock has declined by even larger amounts. This is partly because company stock plans tend to be large, with a median participant population of 2,704, versus 236 for non-company-stock plans. Among employers actively offering company stock, 52% of actively contributing participants had an investment in company stock, Vanguard says. Overall, just 6% of sponsors are actively offering company stock to 28% of active plan participants.

Importantly, Vanguard says the percentage of participants with a concentrated stock position (greater than 20% of their total account balance) dropped by about half between 2005 and 2011.

The analysis finds one driving reason for the decline in employer stock concentration was plan design changes made by sponsors. During the time period studied about one-third of the gross starting number of company stock funds were closed to new money and/or eliminated from the plan. Closing a company stock fund to new money is often a precursor to liquidating and reinvesting assets in the company stock fund, Vanguard notes. 

Another development in company stock plans, driven by fiduciary concerns, has been the introduction of rules designed to mitigate concentrated single-stock positions. As of June 2014, about 6 in 10 organizations offering company stock either restricted contributions and/or exchanges into company stock. This represents another shift: Three years ago, 50% of organizations had company stock restrictions.

Vanguard researchers suggest plan sponsor interest in evaluating employer stock offerings has surged since June in response to the Dudenhoeffer case, in which the U.S. Supreme Court ruled fiduciaries of employee stock ownership plans (ESOPs) are not entitled to any special presumption of prudence under the Employee Retirement Income Security Act (ERISA).

In its sample, participants in plans with access to company stock are more likely to be male, Vanguard explains. The median equity allocation of participants in plans with company stock was higher by five percentage points—86% in plans with company stock versus 81% for plans not offering company stock.

Other findings show company stock plans tend to be more generous and well-funded than non-company-stock plans. Median account balances are higher in company stock plans, Vanguard says, as are median employee and employer contributions.

One reason for the greater generosity of company stock plans is the prevalence of employer matching or other employer contributions. Vanguard says all of the plans it analyzed that offered employer stock as an investment option offer matching contributions, compared with 83% for all Vanguard plans. Further, slightly more than half of organizations with active company stock funds make both matching and other employer contributions to participant accounts—compared with just one-third of all Vanguard plans.

The analysis of company stock offerings is based on Vanguard recordkeeping data as of June 2014, including 1,497 sponsors with 1,901 distinct DC plans. Vanguard notes that the sample has one important caveat: “Our data set is subject to survivorship bias. We are only able to examine plans and participants that have survived through June 2014. We do not observe plans and participants associated with employers that went bankrupt over the period, that were acquired by another entity (whether due to financial distress or other reasons), or that left our recordkeeping services business. For example, if a firm went bankrupt during the financial crisis of 2008–2009 and its stock became worthless, and it liquidated the plan or left our recordkeeping service business, it would not appear in our sample.”

The full report is here.

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