Most DC Plan Participants Overestimate
Likely Future Performance of Their Assets; Few Intend to Take
Action to Address a “Low Return” Era
Small But Effective Measures Can Go a Long
Way; Participants and Plan Sponsors Can Work Together to Narrow the
Savings Gap
American workers are increasingly confident about their
prospects for a financially secure and satisfying retirement – but
many are not prepared for a coming period of lower investment
returns forecast by the financial services industry, according to
the latest DC Pulse Survey from BlackRock (NYSE:BLK), released
today. BlackRock surveyed more than 1,000 participants in defined
contribution (DC) retirement plans and more than 200 plan
sponsors.
The positive news is that the potential retirement savings gap
is not insurmountable and deliberate measures including plan design
and investment changes by DC plan sponsors and participants alike
can get participants back on track.
Some Flawed Assumptions
More than half (56%) of plan participants believe they are on
track to retire with the lifestyle they want and nearly seven in 10
expect to be able to save enough to meet their financial goals in
retirement. However, participants’ optimism might be based on some
flawed assumptions about future investment returns.
New consensus forecasts by Horizon Actuarial – based on a survey
of 35 financial industry firms (including BlackRock) – suggest
that, for the foreseeable future, stock and bond returns could be
half that of recent decades. Yet, 66% of workers believe
that over the next decade, returns on their savings will continue
to be in line with what they have experienced in the past, while
17% believe they will experience even higher returns.
“Though plan participants are feeling positive about their
retirement prospects, it’s critical that they understand how
investment market realities are likely to demand significant
adjustments in their retirement planning,” said Anne Ackerley, head
of BlackRock’s U.S. and Canada Defined Contribution group. “If
equipped with accurate information about what they’re up against –
and good tools for meeting those realities – they can be much
better positioned to take the right action steps to ensure a
financially secure retirement.”
BlackRock offers DC plan sponsors and participants the following
tips for meeting a low-return market environment:
For Plan Sponsors:
- Maximize plan design tools –
including auto features and reenrollment – to improve participant
outcomes.
- Revamp strategic communications
to target participants at different life stages, whether they are
nearing retirement or just beginning their careers.
- Restructure the company match
and consider additional contributions to help manage the effects of
reduced future returns.
For Plan Participants:
- Save more. Saving enough just to
meet your company’s match likely won’t be enough. Increase your
savings rate and opt in to auto-escalation, that is, automatic,
regular increases in that rate.
- Use time wisely. If you haven’t
started saving yet, get started. Time helps investments do their
work by compounding returns and potentially subsidizing savings
balances.
- Know what you’re on track for.
It’s critical to understand how a savings lump sum today will
translate into an income stream tomorrow. Use an income calculator
to measure the gap between what you are on track to save and what
you may need in retirement.
Retirement Confidence on the Rise, But Low
Returns Pose Risk
Compared with last year’s DC Pulse survey, retirement confidence
is increasing, with participants more likely to describe themselves
as “on track” for retirement (56% vs. 52%), as well as “confident”
(18% vs. 11%) and “optimistic” (22% vs. 17%).
Yet many seem to not recognize that a coming “low returns”
environment could throw a wrench into their planning. Nearly two
thirds (65%) of workers report they are unaware that industry
expectations for future returns are notably lower than what they
had seen or experienced in the past.
Interestingly, many plan sponsors also have misperceptions about
the likely return environment for retirement assets. Seventy
percent of sponsors believe the annualized market returns for U.S.
stocks over the next 10 years will be the same as or higher than
the past. The same goes for bonds: 78% believe bond returns will
remain consistent or be higher than they have been previously.
In the face of the new returns information, the confidence of
both workers and sponsors slips. When presented with the forecasts,
39% of participants indicate they feel very or extremely concerned.
Regarding the effectiveness of workers’ retirement planning, the
survey shows that workers become less confident when it comes to
such issues as whether they are saving enough to get a desired
monthly income (32% confident vs. 44% initially) and taking an
appropriate level of risk to meet retirement goals (33% vs. 53%).
Similarly, the confidence of sponsors that workers are saving
enough for the income they want drops 11 percentage points (to 38%
from 49%).
Perhaps most concerning is that 70% of participants (as well as
54% of sponsors) say they do not expect to do anything different in
the next 12 months to prepare for potential lower returns.
“Most plan participants simply have not come to terms with the
dramatic impact that a low-return environment could have on their
retirement savings,” said Ms. Ackerley. “The reality is that in
order to accumulate the same amount of money that participants
built in previous years by contributing 6% of their earnings,
workers may need to contribute double or even triple that amount
going forward.”
Making a Difference: Sponsors and
Participants Can Partner to Help Increase Retirement
Savings
Both sponsors and participants separately suggest that, to some
extent, it is the other group’s responsibility to address the
issue. Nearly six of 10 participants (59%) rate “increasing the
company match” on their plan contribution as the most helpful thing
their employer could do to address the low-return environment,
while 45% of sponsors say they would encourage participants to save
more.
In BlackRock’s view, there are tools available that sponsors and
participants can utilize to ensure that the emerging realities of
low returns do not wreak havoc on workers’ retirement goals.
“Driving increased savings and maximizing the target date fund
option in DC plans can make a meaningful difference in workers’
retirement planning,” Ms. Ackerley said. “In particular, target
date funds are an indispensable tool for ensuring that participants
are properly invested according to their particular life stage as
well as market conditions.
“Getting better prepared for low returns is critical for both
sponsors and participants, and sponsors have an especially crucial
role to play in optimizing plan features that can best help
participants save and invest for retirement with an eye toward the
challenges of the future,” she said.
About BlackRock
BlackRock is a global leader in investment management, risk
management and advisory services for institutional and retail
clients. At December 31, 2016, BlackRock’s AUM was $5.1 trillion.
BlackRock helps clients around the world meet their goals and
overcome challenges with a range of products that include separate
accounts, mutual funds, iShares® (exchange-traded funds), and other
pooled investment vehicles. BlackRock also offers risk management,
advisory and enterprise investment system services to a broad base
of institutional investors through BlackRock Solutions®. As of
December 31, 2016, the firm had approximately 13,000 employees in
more than 30 countries and a major presence in global markets,
including North and South America, Europe, Asia, Australia and the
Middle East and Africa. For additional information, please visit
the Company’s website at www.blackrock.com | Twitter:
@blackrock_news | Blog: www.blackrockblog.com | LinkedIn:
www.linkedin.com/company/blackrock
About the Survey
The BlackRock DC Pulse survey is a major research study of more
than 200 large defined contribution plan sponsors and more than
1,000 plan participants in the U.S., executed by Market Strategies
International, an independent research company. All respondents
were interviewed using an online survey from 11/29/16 to 12/20/16.
Plan sponsors have at least $300 million in assets, with nearly
half of the respondents serving in benefits or human resources
roles, and the rest in finance, investment or business management
for their organizations. Plan participants are employed full-time
and participating in their employer’s 401(k) or 403(b) plan, with
at least $5,000 in assets in their current account. For the plan
sponsor sample, the survey’s margin of error is +/- 6.9 percentage
points; for the plan participant sample, it is +/- 3.1 percentage
points.
GMC-0218
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