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401(k) Participant Investment Knowledge Remains Low Despite Educational Efforts

The results of the 2004 John Hancock Survey of DC Participants have changed so little over the past 13 years that you may wonder if, perhaps, the same phone listing had been used each year to place phone calls to participants.

The 800 individuals contacted for the survey are, in fact, chosen randomly from participants age 25-65, who currently contribute to an employer sponsored retirement savings plan offering a choice of investment options. The demographics of the 2004 survey, compiled by Matthew Greenwald and Associates, are as follows:

• 52 percent female,
• Average Ann. Salary: $60,800,
• Average Age: 44,
• 49 percent have at least a college degree, and
• 58 percent covered only by a defined contribution savings plan.

After posing 60 questions about the participants' knowledge of investment, preparation for retirement, expectation for investment returns, and their desire for investment advice or assistance, the results are analyzed and interpreted by John Hancock Financial Services, the sponsor of the survey.

Wayne Gates, a general manager with John Hancock who has overseen the surveys since 1995, summarizes, "Each time we conduct this survey, I hope the results will improve, but they haven't. The results still show that the level of investment knowledge and skill remains low and people continue to make many of the same mistakes that they have made in the past." Gates provides the following observations to support his view:

• Since 1997, participants increasingly believe that they are not good investors. When asked to rank themselves as investors on a scale from 1 (little or no investment knowledge) to 5 (relatively knowledgeable about investments), those that scored themselves a "one" increased from 38 percent in 1997 to 44 percent in 2004.
• 2004 was the first time, since inception of the survey, that the respondents reported a decrease in the proportion investing in stocks.
• While respondents reported an increase in the use of fixed income investments in 2004, over the last two years, their familiarity with money market funds and domestic bond funds has remained fairly constant since 1995.
• When asked what types of investments are found in a money market fund (short-term securities, bonds, stocks, short-term securities only), only 9 percent responded short-term securities only. This percentage has remained virtually unchanged since 1997. Although, 48 percent responded that short-term securities were found in a money market fund, 47 percent thought that bonds were found in money market funds and 43 percent also thought that stocks were found in money market funds.
• Since 1991 from 28 percent to 34 percent of respondents think the best time to transfer money into a bond fund is when rates are expected to increase.
• Respondents continue to rank their employer stock fund as less risky than domestic stock funds.
• Since 1995, stable value is the fixed income option that respondents were most likely to know nothing about and this level of unfamiliarity has increased gradually from 27 percent in 1995 to 40 percent in 2004.

The results of the survey are likely to add to the growing frustration of 401(k) plan sponsors and those in the industry that have worked diligently to provide individuals with tools designed to assist them with their retirement planning. It has become increasingly apparent that the majority of plan participants do not utilize much of the education information, investment fund data, and do not access the investment planning and advice provided. This remains true despite the industry's efforts to motivate participants to access the tools, even when the tools are offered in a variety of methods and free of cost.

Although it was Gates' wish that the renewed interest in fixed income over stocks in 2001 and 2002 represented a desire by participants for a more diversified portfolio, he noted that the results are unclear and could reflect a tendency of investors to chase performance as the trends follow the higher performing asset class. "On paper, 401(k) plans provide the right incentives, the right investments, the right educational tools and in many cases investment assistance and advice. But in reality, human nature gets in the way," says Gates.

Until more 401(k) plans change their plan design to address issues identified by behavioral economists such as participant procrastination and inertia, participants cannot expect to meet their retirement investment goals. Fortunately, one program gaining popularity, the SmarT plan, is a prescription to cure procrastination. The plan automatically enrolls participants and automatically increases the participant's contributions over time by aligning it with an increase in the participant's annual income, such as a raise. Other programs providing automatic rebalancing and managed investment accounts are being adopted to address the difficulty participants have in changing their investment mix. To gain broad acceptance, strategies must also simplify as much of the process as possible by bringing account information, education and advice tools together in an easy to use platform.

For stable value, the challenge may be even greater. Even though participant familiarity of fixed income investments has increased over the past the 2004 John Hancock survey illustrates that participants are becoming increasingly unaware of stable value as an investment option. Part of stable value's problem is that many plans do not offer it. "This is because new plan formation has been at the smaller end of the market, and stable value has lower market penetration in these plans" explains Wayne Gates. This issue, in addition to the incorporation of stable value within life style, balanced funds and managed account programs will need to be addressed by the industry to ensure that all 401(k) investors have access to a stable value fund.

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