Participants December 15, 2015

Optimistic Investors Gear Up for New Year

Despite looming unexpected financial burdens and interest rate uncertainty, investors express enthusiasm for their finances in 2016.
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New data released by Hartford Funds shows high levels of investor optimism going into 2016, despite major life changes potentially throwing finances off-kilter. The survey also shines a light on investor expectations about which events will most likely affect their finances.

The results underscore the importance of context in financial planning, according to John Diehl, senior vice president of strategic markets at Hartford Funds. “Investors’ confidence should be tied directly to tracking against their goals and having a strong understanding of how life can throw financial curveballs,” Diehl says. “Taking a more human-centric approach to investing helps advisers and investors see the big picture when it comes to life and finances.”

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U.S. investors are optimistic about their financial health and plan to take action in 2016. Nearly half (44%) anticipate their overall financial situation will improve, and 54% say they are very or somewhat confident about their investments. Only 14% anticipate their financial situation will worsen.

Investors under age 60 are highly likely to take specific actions to improve their finances. Ninety-one percent of investors between the ages of 18 and 44, and 89% between the ages of 45 to 59, plan on doing one of the following to be more financially stable: pay down debt, review and adjust investments, spend less, save more or downsize their life.

While less likely than their younger counterparts to take a specific action to improve their finances, a full 69% of respondents 60 and older still plan to make a change. Older respondents were most likely to say they will review and adjust investments compared with those under 60, who identified paying down debt as their first move toward financial stability.

NEXT: Significant life events judged unlikely to affect finances

This year presented major personal milestones for a noteworthy number of investors, and 39% expect to experience a significant life event in 2016. Nearly one-fifth of Americans expect to be dealing with an aging parent. Eighteen percent of respondents under the age of 45 expect a parent or child to move into their home. Despite the financial implications of these and other life events, more than half (53%) of investors don’t expect major personal events to impact their finances.

“Nearly all major life events have financial implications,” says Bill McManus, director of strategic markets, Hartford Funds. “It’s easier to plan for and reach those financial goals when we can anticipate events, such as sending a child to college. However, it’s just as important to plan for the unexpected. Advisers have a real opportunity to provide strategic direction when there’s no clear roadmap for the unknown.”

Interest rates rank relatively far down on the list of factors investors believe will most impact their investments, despite being front and center for the market. In fact, about 30% of investors expect events around the world that affect the global economy to have the largest effect on their finances. Fewer than half that number—14%—expect interest rates to have the biggest impact on their finances in 2016. A quarter of respondents pointed to stock market volatility, while 18% cited economic growth and 13% expect the presidential election to have the biggest impact on their finances next year.

Day to day and even month to month, Diehl says, a variety of events can affect a portfolio, making it challenging to take emotions out of the investment equation—but remaining objective is critical, so that the headlines do not drive an investment strategy. “The key is to remain focused on progress against achieving financial goals,” he advises.

ORC International surveyed 778 U.S. investors from November 12 to 18. Investors are defined as adults age 18 and older, with investable assets of at least $100,000.

Administration December 15, 2015

Top Action Points for DC Plans in 2016

Leading-edge employers already know “retirement plans are not enough” when it comes to improving employees’ long-term financial outlook, according to a new Mercer study. 

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Research from Mercer suggests that the work of defined contribution (DC) plan sponsors is often affected by the broader financial issues faced by their company’s work force, so it makes sense to include broader topics and considerations about financial wellness in the benefits design effort.  

The findings are from a new Mercer survey, “Inside Employees’ Minds,” which finds younger employees “are more concerned with current financial challenges and making ends meet than with saving for retirement.” Of particular importance, Mercer finds, just fairly small groups of workers, whether Millennials or Baby Boomers, say they are particularly concerned about their retirement outlook.

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The lack of concern is itself concerning, Mercer says, and the findings demonstrate that employers need to consider broader financial wellness rather than only employees’ and retirees’ ability to achieve a target income replacement ratio. Betsy Dill, financial wellness advisory leader at Mercer, says plan sponsors can no longer rely on the simple message of “contribute more, or else.”

“Many individuals who are dealing with immediate needs feel they have to focus more on reducing debt than they do on making extra retirement contributions,” Dill says. “Employees will receive far more value from receiving help in making the best decisions to suit their own financial circumstances—not necessarily focusing solely on their retirement plans.”

With this point in mind, Mercer encourages employers to “question their current retirement and financial offerings.”

NEXT: Questions to ask 

The first question plan officials should ask heading into 2016, according to Mercer, is whether the programs offered to help employees address their financial needs are actually understood and used at a satisfactory level. There is no sense in investing additional dollars in the benefits package if the dollars already being paid in are not being maximized.

As Mercer explains, many large employers, in addition to their defined contribution plan, “offer employees the ability to access financial advice, tools that calculate retirement income, algorithms to recommend asset allocations, health advocacy for dependents and parents and assorted voluntary benefits, among other options.” Very often some or all of these programs go underutilized in a given employee population.

Another important consideration is for the sponsor to put itself in the shoes of the plan participant, as it were. What is it like to actually use the plan, and are there common points of friction that can be addressed? A key extension of this question, Mercer says, is to ask: How different is the retirement experience of men and women in the organization likely to be? Of employees at different salary levels, or in different job functions? 

“Women face a myriad of challenges in the work force, including lower salaries, more employment gaps and longer life expectancy,” Mercer says. “Women also typically have retirement balances that are 30% to 40% lower than those of men. Employers need to use analytics to understand the differences and develop targeted communication or support strategies to address these realities.”

Beyond the increasingly common issue of streamlining the investment menu to promote easier decisionmaking, Mercer urges plan sponsors to ask whether their benefits ecosystem maximizes tax efficiency. For example, the youngest employees in a given work force could potentially benefit from Roth contributions rather than a pre-tax election, Mercer says. “Also, the ability to offer in-plan Roth conversions can increase opportunities for tax diversification and efficiencies, especially in combination with traditional after-tax contributions,” the firm says.

NEXT: More questions to ask 

Mercer reminds plan sponsors that lifetime employment is “extremely unlikely these days.”

“Are you encouraging participants to consolidate their balances into your plan?” the firm asks. “We believe that many participants would benefit from having all retirement assets in one place. It would make managing retirement assets less complex, and in-plan investment fees are typically far lower. In addition, higher assets within a plan drive down costs for everyone through economies of scale.”

Beyond all these points, plan sponsors must also be aware that “round two of money market reform will take effect in October 2016.” According to Mercer, the ongoing reforms “have reduced the expected returns and made [some money market options] less customer-friendly, as well as caused potential implementation challenges for DC plans.” Sponsors should therefore “consider whether a money market fund remains a suitable option or whether other alternatives—such as stable value—better meet objectives.”

Finally, Mercer predicts that the distinct themes of retirement income planning, environmentally and socially responsible investing, and retirement plan leakage will all be major discussion points in 2016, so now is the time for DC plan sponsors to start thinking deeply about them.

“Overall, employers need to realize that their employees’ financial needs are evolving, so their approach and offerings need to evolve in tandem to meet those needs,” Dill concludes. “Empowering employees to make better financial choices through education and programs can boost employees’ morale, productivity and focus.”

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