JPMorgan recently released a white paper titled “Searching for Certainty: Observations and opinions on how changing market conditions are affecting 401(k) plan participant outcomes.” The study, which surveyed 1,000 individuals with 401(k) plans nationwide, reveals a fundamental shift since 2007 largely due to the market conditions of the past several years.
According to the paper, participants are focusing on financial issues, but “on a near-term basis.” Half of the respondents indicated their number one financial concern was meeting monthly obligations. A distant second and third were saving for retirement and reducing their mortgage, respectfully.
With regards to company sponsored retirement plans, the study concluded that many participants remain “accidental investors” or rather, participants without actively managing their accounts.
According to the study, 45% of participants never call or visit the provider’s website to monitor their account.
The white paper also discussed the growing trend called the “pensionization” of defined contribution plans. Employees appear to be relying upon employer decisions with their retirement plan. Examples to combat employee inertia include automatic enrollment, automatic deferral escalation and qualified default investment alternatives (QDIA).
Finally, the report brought back the concept that we often see appear in these types of studies: the goal of using the retirement plan to bridge the gap between what programs such as social security will provide and what the participant will actually need in retirement. Most studies in the past focused on lower income employees, but this study identified an emerging risk for high-income employees due to the fact that they can expect a smaller percentage income replacement from Social Security. As a result, this group must do more to supplement that shortfall. According to JPMorgan, the high-income group (those defined as earning over $100,000 per year) has the following characteristics:
- Half are “concerned about having enough money to make ends meet.”
- Half of all loans are to high-income employees and they represent half of the value of all loans, despite the fact that the highly compensated group as a whole is typically a fraction of all employees.
- A quarter of high-income employees owe more than $10,000 in credit card debt, versus only 12% of those making less than $50,000 per year.
In summary, the passivity of participants is somewhat universal and not limited to any particular income level. Education needs to focus on how decisions today can impact the dollars of tomorrow.