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SVIA's Conservative Investments Survey Finds 401(k) Investors Stay Confident Despite Market Troubles

Confidence from Moderation and Conservative Investments

The Stable Value Investment Association's (SVIA) Conservative Investments Survey provides a wealth of information about 401(k) investors' concerns and practices. This article attempts to highlight just a few of the more interesting discoveries. Specifically:

• 401(k) investors have confidence in the safety of their 401(k) investments despite current market swings and a flurry of financial restatements and bankruptcy filings.
• Investors report a low tolerance for risk when it comes to retirement savings.
• Investors rely upon conservative investments such as money market, bond and Stable Value Funds.
• Most investors report that they are self-reliant when it comes to making their investment decisions. However, rocky financial markets have 401(k) investors desiring professional financial advice or retirement planning.
• Most investors are concerned about the impact of stock performance and lower interest rates on their retirement savings.

SVIA's Conservative Investments Survey focuses on trying to better understand the need for secure, low risk investments in our current investment climate, as well as attempting to gauge the level of familiarity and appeal of Stable Value funds. Mathew Greenwald and Associates conducted the research in May 2002 through a 15-minute national survey with 500 workers who participate in their employer's retirement savings plans and 300 retirees who had balance of at least $5,000 in their former 401(k) plans.

90% of Participants Confident in 401(k) Investments' Safety

Despite the growing concern about the integrity of financial information provided by corporate America and continued stock market turbulence, 90% of workers and retirees have confidence in the safety of their 401(k) investments. The survey finds that less than 10% of retirees and workers are shaken by current market instability. The survey finds that only seven percent are "less than confident" and two percent are "not at all confident" in the safety of their retirement investments.

During the 1990s bull market, 401(k) investors focused a great deal on investments in the stock market and became savvier about the different types of equity investment. However, many appear to have miscalculated their tolerance for risk or the potential loss from equity investments. The past 18 months of stock market experience have made investors keenly aware of the downside nature of this risk. In fact, the survey finds most took a moderate approach to investing, which may explain their level of confidence despite continued turbulence in the equity markets.

Investors Shun Risk: Moderation Prevails

The survey finds that the majority of retirees (58%) prefer a retirement investment portfolio that allows them to take the least amount of risk necessary to achieve a steady stream of income. However, only 37% of retirees are willing to take a moderate level of risk in order to receive moderate returns, and one percent report a willingness to take a high level of risk in hopes of having high returns on investments.

Retirees' sensitivity to risk is not surprising since they rely upon this money to make ends meet. It is not conceptual. It is reality. They have fixed incomes and readily understand that a loss can mean a reduction in their standard of living.

What is surprising is the low tolerance for risk among current workers. Only seven percent of respondents report they are willing to take a substantial risk for a substantial gain. The majority (64%) report a willingness to take a moderate amount of risk in the hopes of receiving a moderate return. And, 28% said they are willing to take only a "small" or "minimum" amount of risk, even if it reduces the money they make on their investments.

Stable Value Piques 401(k) Investors' Interest

Market conditions and a desire for moderation also explain the appeal and increased interest in Stable Value Funds. The Survey found that 81% of surveyed workers indicate they would invest in a Stable Value Fund if offered one. Here's what American workers said they like about Stable Value:

• Eighty-one percent find Stable Value's higher rate of return, as compared to money market funds over the past several years, to be very or somewhat appealing.
• Seventy-nine percent find Stable Value's ability to act as a hedge against riskier stock market investments to be desirable.
• Seventy-one percent find Stable Value's ability to produce returns comparable to intermediate bonds but without the associated risks of bonds to be very or somewhat appealing.

Like active workers, retirees also find the characteristics of Stable Value Funds to be appealing. Fifty percent of retirees say that between 10-50% of their retirement assets are invested in conservative investments such as money markets, bonds, or Stable Value Funds.

Stable Value Not Available to All

The survey finds only 42% of workers report having a Stable Value investment option available, while 72% of those who have access to a Stable Value Fund invest in the option.

So where is the dark cloud in all this news for Stable Value? Fifty-eight percent of all 401(k) investors report that they do not have access to Stable Value Funds. They are denied what Stable Value brings to the table¾ a blend of the best features of conservative funds¾returns similar to bonds without the risk of market value loss, and the safety and liquidity of money market funds. Plus, Stable Value Funds generally have lower fees than either money markets or bond funds. In fact, Defined Contribution Plan Investing found Stable Value Funds to be a very economical option based on fees, second only to index funds, with an average cost of 41 basis points!

80% Use Conservative Funds: Stable Value, Bonds & Money Markets

Over 80% of all 401(k) investors report allocating at least 10% of their retirement savings (82% of workers and 88% of retirees) to conservative funds defined as money market funds, bond funds, and Stable Value Funds. Over half of all American workers (54%) and half of all retirees report that between 10 to 50% of 401(k) assets are invested in conservative funds. In fact the survey finds that:

• Eighteen percent of American workers and 12% of retirees say that less than 10% of assets are invested conservatively.
• Twenty-eight percent of American workers and 26% of retirees report that between 10% and 25% of assets are conservatively invested.
• Twenty-six percent of American workers and 24% of retirees report that between 25% and 50% of assets are conservatively invested.
• Twelve percent of American workers and retirees report that between 50% and 75% of assets are conservatively invested.
• Eleven percent of American workers and 15% of retirees report that 75% or more of their assets are conservatively invested.

Confident but Not Complacent about Stocks and Low Interest Rates

Although 401(k) respondents are confident in their 401(k) investments, they are not immune to market woes. The almost continuous report of negative corporate events has made an impact on 401(k) investors' psyche. Over 60% of investors (both actives and retirees) report having concerns about the impact that lower returns from their stock investments or low interest rates could have on their retirement savings. Roughly 40% of both groups indicate that recent corporate failures and their impact on the safety of their investments are a concern. However, 401(k) investors begin to divide when it comes to employer stock. Only 17% of retirees are concerned with the safety of company stock in their retirement savings compared to 44% of workers.

Most Investors Self-Reliant

Despite prolonged volatility in the financial markets, most 401(k) investors go it alone, relying primarily on themselves and the information provided by their employer or savings plan provider in making retirement investment decisions. SVIA's survey finds that 52% of all retirees and almost half of all workers (48%) rely on their own judgment and investment knowledge when it comes to making retirement investment decisions.

Fifty-three percent of workers say they rely most on information provided by an employer or the savings plan provider in determining where to invest retirement savings, yet only 12% of retirees rely on this source. While this contrast is striking, over 80% of retirees report moving money out of their employer's 401(k) plan into Individual Retirement Accounts (55%), cash (25%), and other investments (26%). Approximately one-third (32%) of retirees report leaving their retirement savings in their former employer's defined contribution or 401(k) plan.

Retirees say they turn to financial advisers (51%), newspapers and magazines (40%), family and friends (17%), and asset allocation models (7%) for retirement advice. American workers rely less on financial advisers (44%) compared to retirees and more on other sources for retirement investment information: 32% newspapers and magazines, 26% family and friends, and 12% on asset allocation models.

Sixty-nine percent of workers and 50% of retirees rely upon prospectus and other written information when making investment choices concerning their retirement savings. Fifty-seven percent of workers use workshops on retirement planning and investing for retirement investment information, while only 37% of retirees use this option. The survey finds a similar result with the use of asset allocation models and computer software when it comes to making retirement investment decisions: 42% of workers and 26% of retirees use this type of assistance.

A complete summary of SVIA's Conservative Investments Survey is available for SVIA members' use in the Members Only section at www.stablevalue.org. The survey is available for purchase to non-SVIA members.

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