What s Working and Not Working for 401(k) Small Plan Participants The Guardian Small Plan 401(k) RetireWell StudySM 2.0 GUARDIAN RETIREMENT SOLUTIONS FOR PLAN SPONSORS
Who Did We Survey? Methodology Guardian Retirement Solutions enlisted the assistance of Brightwork Partners, LLC to conduct a nationally-representative, quantitative 25-minute online survey of 2,000 active 401(k) participants in November 2014. To qualify, respondents had to meet the following criteria: Work full-time or part-time for a for-profit enterprise Be eligible to contribute to a 401(k) plan Currently contributing to a 401(k) plan If not currently contributing, have a balance in their current plan of $1,000 or more Small Business Owner Focus Because employees of smaller businesses represent a relatively small proportion of all 401(k) participants nationally, the sample was designed to represent these workers robustly while also representing participants employed at firms of all sizes accurately. 401(k) Plan Participants by Size of Workplace (employees) 13% 100 to 499 12% 25 to 99 5% 1 to 24 34% 10000+ 15% 500 to 2499 21% 2500 to 9999 Brightwork Partners is not an affiliate and/or subsidiary of The Guardian Life Insurance Company of America (Guardian) or The Guardian Insurance & Annuity Company, Inc. (GIAC).
Six Things We Learned 401(k)s Work for Plan 1 Participants Retirement Confidence 2 May be Misplaced 3 Participant Education May Improve Outcomes 4 Contribution Rates Could be Driven Higher Small Plan Participants 5 are Missing Out Financial Professionals 6 Can Help 2
1 401(k)s Work for Plan Participants Emotionally Speaking Not only do participants of all plan sizes expect a majority of their income to be from 401(k)s, 77% also perceive it to be the most important source of income in retirement. 401(k) Statistically Speaking Whether as an anticipated percentage of their retirement income, or as an emotional imprint looking ahead, participants look first and foremost to their 401(k): 1/3 of retirement income comes from 401(k): The 401(k) plan, and other defined contribution plans that may be available to the household, are by far the biggest anticipated source of income, accounting for more than one-third of participants retirement income. The DC Plan Drives Retirement Income Essentially, not only do plan participants of all plan sizes expect the majority of their income to be from 401(k)s, they also perceive it to be the most important source of income in retirement. Q1: Approximately what percentage of your household income do you expect this source to provide in retirement? Q2: How important do you expect this income source to be to your household in retirement? ("Very Important" indicated below) 401(k) plan, 403(b), 457 or other types of tax deferred defined contribution plan 34% 77% Social Security 24% 62% Income from personal savings, including Individual Retirement Accounts (IRAs) Earnings from employment, including self-employment Other (including defined benefit)* 12% 61% 10% 56% 20% 3 * Defined Benefit Plans, Income from real estate, income from inheritance, other workplace retirement plans, and fixed or variable annuities.
Overall Satisfaction is High So how do participants feel about 401(k) plans overall? 401(k)s are working for participants because an overwhelming 92% tell us they are satisfied with their plan overall, including 32% who say they are very satisfied. Similarly large proportions are also significantly satisfied with other parts of their 401k plan: 90% 92% of Participants are Very or Somewhat Satisfied with their 401(k) Plan. Are Very or Somewhat Satisfied with the Investments Available to Them in Their Plan Participants Not Overly Concerned with Fees For all the emphasis on fee disclosure during the past few years, participants are pretty un-phased when it comes to fees and expenses in their plan. Q: From what you know or have read, would you say the fees and expenses in your 401(k) are: 87% Are Very or Somewhat Satisfied with the Information They Get About Their Plan 23% Very Reasonable 59% Somewhat Reasonable 89% Are Very or Somewhat Satisfied with the Features of Their Plan (Apart from the Investments) 14% Somewhat Unreasonable 5% Very Unreasonable 4
2 Retirement Confidence May be Misplaced Too Ambitious? 95% Income Replacement Ratio Participants Target a High Average Replacement Ratio Participants embrace 401(k)s as their primary retirement savings vehicle for many reasons, but mainly because they know the task ahead in retirement is huge. Participants have big dreams; on average, they are hoping to replace fully 95% of their current income in retirement. This is quite an ambitious goal and exceeds the 70-80% replacement ratio most industry experts recommend. Retirement Replacement Ratios Desired Income Replacement Ratio % of Participants < 50% 19% 50% - 70% 18% 70% - 100% 13% 100% 27% > 100% 15% 65
Confidence in Reaching Target Replacement Ratio is Mixed Participants are mixed in terms of their outlook; fully 50% are only somewhat confident that they will hit their target. Q: How confident are you that you will achieve that target income in retirement? 21% very confident 22% not very confident not confident at all 6% 50% somewhat confident Participants who are on their way to success the very confident 21% in this chart, usually have high balances, above-average incomes, high deferral rates, use a financial professional and allocate assets appropriately. They are doing just about everything right and they know it. Participants are Confused In spite of the ambitious aspirations 95% income replacement there s an obvious disconnect here between the income replacement ratio participants are targeting, and the reality of some of their expectations in retirement. 69% Do Not Expect to Live as Well or Better in Retirement 62% Do Not Expect to Have Enough Money to Pay for Healthcare 49% Expect to Work in Retirement Participants who are on their way to failure, the 28% who are not confident that they will achieve their retirement income target, are doing almost everything wrong and they know it as well. At least at the extremes, participants are pretty realistic about the connection between savings behavior today and retirement income tomorrow. Where it s tougher to gauge is in the vast middle, the 50% of participants who are somewhat confident that they are on track. Clearly, some are, some aren t, there s a lot of hope mixed with fear as participants look ahead. QUESTIONS TO ASK YOURSELF Do you feel participants are getting the education they need & deserve to understand their retirement readiness? 76
3 Participant Education May Improve Outcomes Lack of Comprehension While being familiar with a term is one thing, comprehension is another. Among those who have heard of vesting, for example, fewer than half assert that they understand the term completely. Lack of Vocabulary Some basic 401(k) terms still don t have much of a footprint among participants. Most participants, for example, have heard the term contribution rate or vesting or have heard about loans from their accounts. But only half or fewer have heard of target date funds, dollar cost averaging or target risk funds. An unsettling notion given these participants are targeting high rates of return. Q: Which of the following terms, if any, have you heard of in connection with your 401(k)? Two-thirds of participants who have heard of target date or target risk funds assert they do not understand the term. And let s hazard a guess that if we really put these participants under a microscope, their comprehension might turn out to be even more limited than they are willing to admit. Contribution rate Vesting of employer contributions Loans from your account Target date funds 50% 82% 77% 75% Dollar cost averaging 45% Target risk funds 39% 7
Limited Understanding May Mean Limited Engagement Without demonstrating causality, it s certainly reasonable to speculate on the link between comprehension and clarity, and participant engagement. This chart demonstrates how participants are famously disengaged possibly owing to a lack of understanding of various aspects of their plan. Disengagement is also more pronounced in the small plan market represented by the yellow bars. Q: In the Past Year Did You ACTION YES Increase the proportion of the income you save through your 401(k) plan 16% 34% Contribute to a Roth 401(k) plan 18% 23% Enroll in a 401(k) account with this employer 16% 23% Stop contributing to your 401(k) plan 10% 18% None of these 30% 37% Total (All Plan Sizes) 1 to 24 (Employees) One-third of all 401(k) participants didn t do anything! While sometimes this is a good thing for longer-term investors (although you would hope they are properly invested if they are leaving it alone), it does raise questions around overall engagement. If participants had a better grasp of basic retirement planning terms or how 401(k)s work, or what a 401(k) plan could do for them, wouldn t they be more appropriately engaged? QUESTIONS TO ASK YOURSELF Are you satisfied with the education support your plans receive today? Does your plan have an education policy in place to address engagement? 8
4 Contribution Rates Could be Driven Higher Most Are Not Maxing Out Missed Tax Efficiency? Powerful as the 401(k) platform is for helping participants achieve their goals, it still remains under utilized. Under Age 50 Only 15% Maxing Contributions Over Age 50 Only 11% Maxing Contributions Not Maxing Out The average 401(k) participant under 50 contributes $8,700 per year to his or her account; for those 50 or over the average is $9,100. In both cases this equates to a median deferral rate of 9% of personal income, certainly less than most financial professionals recommend to build secure retirement income. It s good, but it s not great. They're Saving Elsewhere... However, participants not taking full advantage of their 401(k)s is all the more tragic because they are saving additional dollars for retirement, they just aren t using their 401(k) plan as the vehicle. More than half of participants (52%), in fact, expect personal savings outside their defined contribution plan to contribute to their retirement income. Recall they are looking to personal savings to provide 12% of their retirement income dollars, just behind Social Security but ahead of earnings from employment in retirement. Just think how much more powerful this additional savings would be inside the tax-advantaged structure of 401(k). 52% expect retirement income from outside of their defined contribution plan (includes IRA Rollovers which may be from DC Plans) Personal Savings is viewed as the 3rd largest source of income (after defined contribution plans and social security) 9
Showing an Income Calculation May Work If participants knew that their current contribution rate would replace only 50% of their income in retirement that s the bottom bar on this chart fully 41% of them say they would increase the rate while 55% would leave it the same. If, in contrast, they thought they were on track to replace 100% of their income that s the top bar 25% still say they would increase their contribution rate (although 12% say they would dial back). Q: If you knew that your current contribution rate would enable you to replace (50%/75%/100%) of your working income in retirement, what would you be likely to do? 50%* 41% 75%* 30% 100%* 25% * Current Income Replacement Ratio %Likelihood to Increase Contribution Rate Without pretending that this is a predictive model of exactly what would happen with better participant education and planning tools, this result nonetheless shows the direction and potential sensitivity of actual savings behavior to better information. The simple conclusion is that the more participants know, the more they will save. Still Focused on Balance, not Income Participants are stuck on an accumulation mindset. 54% pay a "great deal" of attention to their account balance. Only 29% pay a "great deal" of attention to income. 54% Focused on Account Balance 29% Focused on Income 5 Ways To Drive Contribution Increases Here are some additional actions that could help drive increased contributions: Q: How likely would you be to increase the proportion of your income you contribute to your 401(k) if? 1. 79% 2. 75% You had a better sense of how much retirement income your contributions are creating You had a better understanding of the investments available to you in your 401(k) plan QUESTIONS TO ASK YOURSELF Have participants been offered a retirement income gap analysis? 3. 73% 4. 69% 5. 69% A financial professional showed you how to invest assets in your 401(k) You had better educational materials from the company that manages your 401(k) plan You learned that others of your age and income were saving a bigger proportion of their income than you are Are regular enrollment and lunch n' learn offered? What does the investment menu look like? 10
5 Small Plan Participants are Missing Out Plan Features In terms of plan features and available investment options, small plans tend to fare worse than their larger counterparts. Q: For each item below, please indicate whether that feature is available to you in your current 401(k) plan or not. A contribution from your employer matching your own contribution up to a certain amount 65% 78% Planning tools that help you estimate how much income in retirement your contributions are building 53% 62% Having knowledgeable and responsive telephone service reps 49% 57% A managed account program in which a financial professional selects, allocates and trades investments in your 401(k) for a fee Total (All Plan Sizes) 33% 43% 1 to 24 (Employees) In terms of plan design, for example, a match is much less prevalent at firms with fewer than 25 employees than with employees of firms of all sizes. This, of course, is a big expense for a business owner. But look at some other features which are also less prevalent at the small end, many of which wouldn t or shouldn t cost the business owner much if anything: retirement income planning tools, telephone service reps, auto enrollment and auto deferral rate step up and a managed account program. Why can t workers at small firms have equivalent access to these features too? 11
Investment Options Participants generally have access to fewer investment options than 401(k) participants at larger companies. Q: As far as you know, does your 401(k) plan offer...? Stock mutual funds covering a broad range of company sizes, sectors and regions of the world 46% 50% Stock in your own company 20% 47% Mutual funds you can select based on the year in which you expect to retire (target date funds) 37% 47% Individual stocks or bonds, apart from stock in your own company 34% 41% Stable value funds Fixed rate accounts Total (All Plan Sizes) 27% 37% 36% 32% 1 to 24 (Employees) QUESTIONS TO ASK YOURSELF Do we offer a broad range of investment options across the risk/ reward spectrum? In virtually every asset class tested, small market participants are less likely to have access. This is particularly true in the case of employer stock, but recall these participants are also less likely to have access to a match (often paid in employer stock) and very few companies this size would have stock trading on an exchange. It s important to recall that small market participants are probably less knowledgeable and less engaged in their plans than their larger company counterparts. So in part these findings reflect uncertainty on the one hand and lower access to most investment options on the other. However, whether it s features or investment options, there are opportunities to help enhance overall plan design and investment features made available to small plan participants. Do we offer target date, target risk, or managed account options? Do we leverage fiduciary support providers? Do we have a current investment policy statement? When was the last time we benchmarked the fees and services of our plan? 12
6 Financial Professionals Can Help Many Don't have a Plan Over 60% of plan participants do not have a relationship with a financial professional, a figure which doesn t vary much by size of workplace. Additionally, almost 70% lack a formal financial plan. And, let s remember, these are the same participants who are targeting a 95% income replacement ratio! Q: Does this household have a formal, written financial plan? 33% Have a formal financial plan 67% Do NOT have a financial plan Among the nearly four in ten participants who do have a financial professional relationship, however, retirement planning confidence is much higher 25 to nearly 30 points higher--in fact, when it comes to knowing how to calculate how much money they need in retirement, having enough money to cover health care expenses in retirement and being ready for retirement financially. 13
Overall Satisfaction with 401(k) Increases with the Presence of a Financial Professional. If a participant is fortunate to work with a financial professional, they are much more positive about their 401(k) experience overall. In all cases, working with a financial professional drives higher satisfaction among plan participants. Green means more satisfied with each dimension than all participants, orange means less satisfied. As an example, take the information you get about your 401(k) plan at the top. Among all participants, 30% are very satisfied with plan information. Among those who work with a financial professional, however, this figure jumps to 41% that s to say it s 11 points higher, so that s the green bar. Among participants without a financial professional, the proportion who are very satisfied with plan information drops to 23%, seven points lower than all participants, so that s the red bar. Q: All things considered, how satisfied are you with: The information you get about your 401(k) plan No Financial Professional -7% Use Financial Professional 11% The investments available to you in your 401(k) plan The features available to you in your 401(k) plan apart from the investments Your 401(k) plan overall -7% -6% -7% 11% 11% 11% Less Satisfied than All Participants More Satisfied than All Participants QUESTIONS TO ASK YOURSELF Are you getting value from your current financial professional? Do they facilitate programs to support the education needs of your participants?
It s About YOU At Guardian Retirement Solutions TM it s about you. Your business, your employees, your retirement plan. We are dedicated to working with you, your third-party administrator (TPA) and your financial professional to help you provide your employees with a retirement solution to help them save for the long-term. Guardian Retirement Solutions TM is focused solely on serving the unique needs of small businesses like yours by providing access to services typically reserved for large plans. You can count on us to provide the resources, support and tools you re looking for as you develop a retirement solution that works for you and your employees. Contact Guardian Retirement Solutions TM Call: 877-500-2380 Visit: 401k.GuardianLife.com The Guardian Advantage group variable annuity contract and The Guardian Choice group variable funding agreement are issued by The Guardian Insurance & Annuity Company, Inc. (GIAC), a Delaware corporation whose principal place of business is 7 Hanover Square, New York, NY 10004. GIAC is a wholly owned subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. Guardian does not issue The Guardian Choice and The Guardian Advantage and does not guarantee the benefits they provide. Guardian Retirement Solutions refers to the administrative support services, including participant recordkeeping as well as marketing, enrollment and educational materials, provided by GIAC in conjunction with the individual and group retirement products issued by GIAC. This guide is not intended by The Guardian Life Insurance Company of America, The Guardian Insurance & Annuity Company, Inc. (GIAC) or any of its employees or agents to be considered as investment, tax, or legal advice. Please consult your investment, tax and legal advisors for guidance and information that is specific to your plan. Brightwork Partners is not an affiliate and/or subsidiary of The Guardian Life Insurance Company of America (Guardian) or The Guardian Insurance & Annuity Company, Inc. (GIAC). The Guardian Life Insurance Company of America 7 Hanover Square New York, NY 10004-4025 www.401k.guardianlife.com GP017257 04/15 2015-3642 (Exp. 04/16)