MFS survey highlights the importance of focusing on 401(k) basics
BOSTON (June 12, 2014) – Retirement plan investors are not taking full advantage of the basic benefits of 401(k) plans, according to a recent survey from MFS Investment Management (MFS). Plan participants also struggle to make sense of complicated investment menus. Almost three-quarters (74%) of participants surveyed say that having a little bit invested in each option of a 401(k) plan is the best way to diversify while 52% of 401(k) participants are not aware of the tax impact that a $100 contribution will have on their take home pay. And almost half of the participants surveyed (46%) believe that the money saved in their retirement plans is a good source of funding for other financial needs, like paying off debt or saving for college.
"Companies and their retirement plan participants have access to the necessary ingredients to generate successful outcomes in defined contribution plans," said Ravi Venkataraman, global head of Consultant Relations and Defined Contribution at MFS. "Solving the retirement equation is within reach — it comes down to making steady and consistent contributions, investing in an age appropriate and well diversified portfolio, refraining from taking premature withdrawals and maintaining a long term view."
The MFS survey finds that investors often contribute just enough to receive the maximum employer match. Nearly a quarter (23%) of plan participants surveyed believe that there is no additional benefit to contributing more than is necessary to receive the employer matching contribution. The number jumps to 37% among Generation Y respondents.
The survey also reveals that many investors do not have a clear understanding of target date funds and index funds — two of the most popular retirement plan investment options. Despite the fact that they are often the default option for many retirement plan participants, only 18% of participants believe that investing in target date funds is the ideal way to diversify a 401(k) account. Index funds have also attracted significant investor interest in recent years. However, 65% of survey participants incorrectly believe index funds are safer than the overall stock market, and nearly half (49%) believe index funds have better returns than the stock market.
"Often retirement plans leave too many decisions up to participants, many of whom are ill-equipped to make well-informed decisions," said Venkataraman. "Plan sponsors have a number of tools at their disposal that can help participants better invest for retirement. Creating simplified investment menus, implementing auto-enrollment and auto-escalation contribution plans, and offering professionally managed, diversified investment options will give participants the greatest chance of successfully investing for retirement"
The survey also highlights areas where plan sponsors may be focused on things that participants don't necessarily value. For example, 401(k) loans may not be as important to participants as plan sponsors think. Only 4% of survey participants say they would not participate in their 401(k) plan if their employer did not allow them to take a loan. Loans, even if they are paid back, act as a temporary pre-retirement distribution and can greatly impact a participant's account balance at retirement.
"If you remove or significantly limit the ability to take a loan, you can cut down on the temptation to make short-term decisions, such as using retirement funds for short-term funding needs," said Ryan Mullen, senior managing director and head of MFS' Defined Contribution Investments practice. "This is one strategy that can decrease the opportunity for participants to make bad decisions and help keep them focused on a long-term investment horizon."
Please click here to visit MFS.com's Think Long Term section for additional survey results, whitepapers, videos and other resources.
About the survey
MFS, through Research Collaborative, an independent research firm, sponsored an online survey from February 4 to February 11, 2014, of 1,000 defined contribution plan participants in the US between the ages of 20 and 69 who are employed and have at least $1,000 balance in a plan with their current employer. MFS was not identified as the research sponsor. Gen Y refers to plan participants under the age of 34. Gen X refers to plan participants between the ages of 34 and 48. Boomers refers to plan participants between the ages of 49 and 67.
About MFS Investment Management
Established in 1924, MFS is an active, global asset manager with investment offices in Boston, Hong Kong, London, Mexico City, São Paulo, Singapore, Sydney, Tokyo and Toronto. We employ a uniquely collaborative approach to build better insights for our clients. Our investment approach has three core elements: integrated research, global collaboration and active risk management. As of May 31, 2014, MFS manages US$433.1 billion in assets on behalf of individual and institutional investors worldwide.