Bonds gaining ground in retirement portfolios
By Paula Aven Gladych
Despite an overall bullish market outlook, plan participants are becoming more conservative and preferring fixed income choices despite understanding how they work within their portfolio, according to a survey of U.S. workplace retirement plan participants by State Street Global Advisors, the asset management business of State Street Corporation.
Survey respondents were positive about the market and investing; nearly 8 in 10 respondents who invested during the market downturn said they are contributing as much or more now than they did five years ago.
Despite their confidence - the survey found that although investors traditionally invest more aggressively as their optimism increases - 49 percent are currently investing more conservatively than they did five years ago. Only 7 percent of defined contribution investors said they were taking a more aggressive approach.
“Plan sponsors need to recognize participants’ new conservative mindset and design a plan menu that helps them invest to meet their financial goals,” said Fredrik Axsater, senior managing director and global head of defined contribution at State Street Global Advisors. “Participants are afraid of losing their retirement savings and are shying away from making more aggressive allocations. This is particularly concerning for younger investors who may not understand how a conservative approach can limit the growth needed to fund retirement.”
Out of those surveyed, 76 percent said their DC plan is the same or in better shape than five years ago and 78 percent think that in five years the market will be the same or in better shape than it is today.
Seventy-nine percent said they have maintained or increased their contribution levels since the financial crisis.
Participants are implementing their more-conservative investment approach by holding larger percentages in fixed income, but many responses indicate fundamental misunderstanding about bonds and their role in a retirement portfolio. More than a third of participants indicated that bonds help minimize the impact of inflation, when in fact bond returns are highly vulnerable to inflation increases.
Additionally, many respondents did not select features of bonds that describe their fundamental roles in retirement portfolios. Roughly half did not choose “lower risk than stocks,” six in 10 didn’t choose “better portfolio diversification,” and seven in 10 didn’t choose “reduced volatility.”
State Street recommends that plan sponsors take advantage of market optimism and encourage participants to continue saving more. It also encourages employers to assess portfolios and identify participants who have allocations out of line with the age-appropriate allocations in target-date funds.
It also believes they should simplify their plan menus, develop communications campaigns focused on bonds and other conservative investment options and consider target-date funds to help participants transition from accumulating savings to a more secure retirement income.
Originally published on BenefitsPro.com