Despite a bullish outlook on the market, American DC plan participants are becoming increasingly conservative, with a preference for fixed income without a solid understanding of its role in their portfolio, according to a survey.
The State Street Global Advisors (SSgA) survey of U.S. workplace retirement plan participants finds that 76% say their DC plan is the same or in better shape than five years ago, 78% think that in five years the market will be the same or in better shape than it is today and 79% have maintained or increased their contribution levels since the financial crisis.
Despite this confidence, the survey uncovered indications of a shift toward more conservative investment behaviour.
Although investors traditionally invest more aggressively as their optimism increases, 49% are currently investing more conservatively than they did five years ago and only 7% of DC investors indicate that they are taking a more aggressive approach.
“Plan sponsors need to recognize participants’ new conservative mindset and design a plan menu that helps them invest to meet their financial goals,” says Fredrik Axsater, senior managing director and global head of DC with SSgA. “Participants are afraid of losing their retirement savings and are shying away from making more aggressive allocations.”
Participants are implementing their more conservative investment approach by holding larger percentages in fixed income, but many responses reveal fundamental misunderstanding about bonds and their role in a retirement portfolio.
More than one third of participants indicated that bonds help minimize the impact of inflation. Additionally, many respondents didn’t select features of bonds that describe their fundamental roles in retirement portfolios. Roughly half didn’t choose “lower risk than stocks,” six in 10 didn’t choose “better portfolio diversification,” and seven in 10 didn’t choose “reduced volatility.”
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