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Employees are too complacent about their 401(k) plans

By Ellen Chang/MainStreet.com

The majority of employees admit they know less about their retirement plans than they should, according to a new survey released by State Street Global Advisors, the Boston-based asset manager.

Even worse, only 20 percent of those same people seek advice about their 401(k) plans, the survey found.

Only 31 percent of respondents are "extremely confident" or "very confident" that they have saved enough in their employer-sponsored defined contribution or 401(k) plans to live comfortably in retirement, according to a survey about trends in employer-sponsored retirement programs conducted by SSgA, the investment management business of State Street Corp.

Employees are seeking additional information and help to participate more actively in their plans, said Frederik Axsater, managing director and global head of defined contributions at SSgA, which has $300 billion in assets under management.

Younger employees are interested in learning more about their investment options from social media, while Gen X-ers and Baby Boomers are interested in seminars.

"Participants appreciate support and they are asking for more," he said. "Any additional effort from an employer is welcome, ranging from automation in enrollment to targeted communication."

A recent TIAA-CREF report found that 40 percent of employees who are not currently contributing enough to get the maximum matching funds from their employers said they are happy to get reminders to do so.

Employer-sponsored retirement programs that give information on how much someone will actually spend when they are retired are more valuable, Axsater said. Most programs do not provide enough guidance on how much money you should withdraw in your retirement.

"Having further steps in automation is important since saving early in your career is important," he said. "Saving a sufficient amount needs to be easier."

Being able to see a projection of the amount of income you will have each year is more helpful.

"We need to make it easier to make the transition from accumulation and savings to retirement," Axsater said. "Retirement programs need to communicate more than just the account balance and give an indication on the amount of income they will receive. Seeing an account balance of $25,000 does not tell a 30-year- old employee very much."

A severe lack of financial education exists among the majority of employees, with only 22 percent of respondents saying they are "extremely" knowledgeable or "very" knowledgeable about financial matters such as savings and investing.

Employees are aware that they need to save more for retirement now because the current market returns on stocks and bonds are generating "lower growth and expected returns" than previous cycles, he said.

"The same investor needs to save more," Axsater said. "It takes more today from a savings perceptive to reach a desired level of income replacement. Investors intuitively have a sense of that."

What is lacking is enough guidance from most employers, since 34 percent of respondents said they get their retirement planning information from websites, advisors and financial publications.

Companies can do more since investors want to be engaged in a "dialogue with employers, advisors or friends," he said.

Younger investors gravitate to having a "buddy system" or finding another investor with a background and goals that are similar to theirs.

"Social media is well equipped to provide an ongoing engagement and to connect similar investors," Axsater said. "Retirement is important to younger investors who have lived through the financial crisis and have seen the effects directly from their parents."

Employers are recognizing that the financial health of their employees is important and need to receive the right amount of guidance, said Simon Roy, president of Jemstep, a Los Altos, Calif.-based software program which allows investors to load and link all of their current and previous retirement and brokerage accounts together.

"If employees default into quality, smart investments, they do not need to actively manage their money," he said.

The largest gaps are in the small and mid-sized 401(k) plans since the fund selections are not as good and often no advice is provided since it is not cost effective for advisors to reach out to every employee to give personalized advice, Roy said.

"Investing is intimidating to the majority of people," he said. "It's complicated and there is so much noise. Most people don't know what to do and they tend to do nothing. The gap can be addressed with the benefits of technology with services like Jemstep that can provide personalized, objective advice."

Employees should avoid rebalancing their portfolios too often, said Robert Johnson, a professor of finance for Heider College of Business at Creighton University in Omaha.

"My advice to anyone saving for retirement is to make the maximum possible annual contribution to their 401(k) and not actively monitor the investment," he said.

Instead, individuals should establish a target asset allocation that is consistent with their objectives and risk tolerance and consistently fund their retirement account, Johnson said.

"For most investors, simply investing in a large capitalization index fund for the stock portion of their portfolio is most appropriate," he said. "There are many S&P 500 index funds that charge extremely low fees. The most efficient way to build wealth for the majority of individual investors is to follow a strategy of dollar-cost averaging by regularly purchasing shares in a large capitalization stock index fund or ETF."

Actively monitoring a retirement account plays to investors' inherent behavioral biases, Johnson said. In bear markets, investors often get "very scared" and move assets from equities to bonds or money market securities. In bull markets, investors often get very overconfident and move money from bonds and money market securities to stocks.

"Unfortunately, investors tend to follow a herd mentality," he said. "They end up 'buying high and selling low' exactly because they do monitor their investments."

An investor's target asset allocation should not change because of market conditions, Johnson said.

"It should change because an investor's personal circumstances have changed," he said. "One of the most dangerous places to attempt to learn about the process of investing is by monitoring the 24-hour financial news networks. They often give the impression that short-term trading is what investing is all about. Short-term trading is speculation."

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