Wed, 30 December 2020 | retirement workplace pandemic
A global survey of more than four thousand retirement investors conducted by MFS has cast new light on the challenges encountered by millions potentially facing an uncertain retirement. The current retirement savings gap is estimated at US$70 trillion on a global basis and is projected to increase to approximately US$400 trillion by 2050.1 The impact of the COVID-19 pandemic on jobs, income and the economic outlook has yet to be fully felt but points to a real danger that the crisis will likely exacerbate.
In the United States, 1,005 individuals actively contributing to a workplace retirement plan participated in the survey. Key findings from US participant responses around the central themes of confidence, default strategies, active management and sustainability included:
Challenge #1: Confidence, actual and otherwise
In the US, retirement plan participants show significant confidence in their ability to save for retirement: 72% of survey respondents say they are confident in their investment decisions related to retirement, more than the 66% of respondents globally. However, a deeper dive into their responses indicates some holes in this confidence. For example, 40% of US respondents are worried about outliving their assets and 39% are worried they won't have enough retirement income to maintain their lifestyle. Across the global pool of respondents, 50% feel stressed when thinking about retirement.
"We see in the US that only about half – 51% of respondents – consult a financial professional for help regarding retirement savings, and relatively few – 21% – are utilizing the resources provided by their employer. Given the confidence gaps, plan sponsors and advisors may need to reconsider the educational tools and tactics used in order to better align with the needs of retirement plan investors," said Jon Barry, managing director, Investment Solutions Group at MFS. "A one-size-fits-all approach to educating participants around long-term investing and asset allocation does not work, and we believe greater partnership is needed between plan sponsors, advisors and savers to drive better, more sustainable investment outcomes."
Challenge #2: Default strategy fault lines On one side, US plan participants seem to have a good understanding of how target date default strategies work, with 74% of respondents agreeing these strategies offer easy, one-stop diversification and 77% agreeing they get more conservative as retirement nears. However, when we dig deeper, we encounter some troubling misconceptions: More than half of respondents believe that target date default strategies provide a guaranteed rate of return (52%), invest entirely in cash or other low-risk investments once the participant is retired (53%) and provide a guaranteed stream of income at retirement (56%).
"Over the past few years, target date funds have become a critical component of the retirement system, and our data show that participants rightfully appreciate the ease of use and diversification that these vehicles provide. That's good news, but our survey shows that sponsors, advisors and consultants need to do more to help participants understand how target date funds work, especially as those participants get closer to retirement," added Barry.
Challenge #3: Active or passive? Wrong question.
The survey also indicates a limited understanding of active management, which, when coupled with a potential low return environment, could place a higher burden on plan sponsors to help their employees achieve their retirement savings goals. In the US, only 28% of those surveyed indicate that they have a high level of understanding of active management while globally 61% indicate they cannot tell the difference between active and passive management styles and 52% think that passive funds are less risky than the overall market.
While low cost is often cited as a benefit of passively managed strategies, only 27% of US respondents indicate they always picked the lowest-cost fund regardless of performance. On the flip side, only 34% agree with the statement that they always pick the best-performing fund regardless of cost.
"These results indicate to us that the onus is on plan fiduciaries to construct a lineup that considers the needs of the participant base and provides the best chance of delivering sustainable outcomes at reasonable costs," noted Barry. "It's time to shift the conversation from 'should we have active or passive funds on our menu' to determining how to construct a menu that will work for the long term successful outcome of the retirement investor."
Challenge #4: Sustainability matters Globally, 76% of respondents say they are interested in having more sustainable investments offered by their retirement plans, indicating that investing in line with personal values is important across all regions. Even in the US, where the notion of sustainable investing has not caught on like it has in other regions, 49% of those surveyed believe that retirement investments can be used to address sustainability, or environmental, social and governance (ESG), issues.
"The data show that ESG is important to participants, and we believe that sponsors should help them understand how sustainability is addressed in the plan menu," concluded Barry. "While ESG factors and issues can change over time, we believe plan providers should consider investment managers who integrate sustainability into their long-term investment process across their portfolios."
Source: MFS Press Release