Plan sponsors and plan participants agree that debt is a primary challenge to saving for retirement, but have differing views when it comes to risk, nudges, and the importance of ESG choices.
This according to new research by American Century Investments, which compared and contrasted insights of both plan sponsors and participants in its seventh annual study.
Although 40% of retirement plan sponsors believe market risk is the most important factor in target-date investments, the survey found 41% of American workers are much more worried about running out of money in retirement.
The study is comprised of responses from 500 defined contribution plan decision makers and 1,500 full-time workers between the ages of 25-65, examining their thoughts and concerns about retirement savings.
“We found that plan sponsors and participants are on the same page regarding debt being the primary barrier to saving,” said Diane Gallagher, Vice President, Value Add at American Century Investments. “However, their views on risk, preferred levels of involvement by employers and the importance of environmental, social and governance (ESG) offerings clearly varied.”
Key study findings include:
- Plan sponsors’ and participants’ views on risk diverge.
- Employees want help with saving for retirement, despite what their employers might think.
- Plan sponsors thought ESG investment offerings were more important than participants believed.
- Employers didn’t always understand the level of their employees’ concerns.
Risk
Some 40% of employers reported that investment risk pertaining to market movements was the most important factor in target-date investments, which are the most commonly used default for retirement plans.
Also, more than 60% were more concerned about their fiduciary liability now than ever before. Yet a comparable number of employees were much more concerned about longevity risk.
“Employees’ single-biggest fear is running out of money in retirement,” Gallagher said.
Nudge
Plan sponsors’ view of the level of help participants desire also differed from reality, according to the research.
Only 14% of younger plan participants (ages 25-54) wanted employers to “leave them alone” when it came to help with retirement savings; 18% of older plan participants (ages 55-65) felt the same way.
However, plan sponsors thought some 28% of participants wanted to be left alone. And in reality, more than 80% of those participants wanted at least a “slight nudge” from their employers.
“Employers underestimate the level of help employees want,” Gallagher said. “We tend to listen to the ‘squeaky wheel,’ the person who says, ‘I’ve got this,’ but most workers want help; they want guardrails.”
ESG
The study found that the importance of offering ESG options in plans varied between plan sponsors and participants. Nearly all—90%—of sponsors who offered or are considering offering ESG investments believe their participants would be interested, and two-thirds of sponsors say their retirement plan advisor is currently or should be recommending ESG solutions.
However, only 37% of participants actually expressed some interest in ESG options. Gallagher noted that those individuals would be interested if the ESG investment’s performance was comparable to the average product.
“It will be interesting to track employee sentiment in the future and compare their interest in ESG choices down the road as individuals become more familiar with the term,” she added.
Sentiment
More than 85% of employees have at least a “little regret” about not doing a better job saving for retirement, while 20% express a “great deal” of regret. Not surprisingly, their top regret is not saving more: seven out of 10 said they did not save enough in the first five years of their careers.
“Regret about not saving enough for retirement was more important to workers than not doing better in their careers, not doing better in their personal relationships or even not being a better person overall,” Gallagher said.
Some 90% agreed that their workplace retirement savings plan is one of the most important benefits their employer offers.
“We’ve seen a shift in sentiment over the years,” Gallagher said. “Employees are looking for a level of independence, versus affluence, as more of a measured goal for their retirement.”
Finally, plan sponsors and employees are aligned when it comes to the primary barrier to saving. For the first time, debt topped the list, ahead of other reasons such as not earning enough, unexpected expenses and enjoying today rather than saving.
“We’ve heard plan participants say that they were always trying to get out of debt, so they didn’t start saving early enough,” Gallagher said. “The most important thing workers can do is take advantage of their retirement savings plan at work.”
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
