Invesco today released findings from its new study, "The Forgotten Participant," examining defined contribution (DC) participant investing behaviors and decision making.
The research finds that while DC plan providers have made significant progress in helping participants address the challenges of reaching a financially secure retirement through auto enrollment, auto escalation and auto default into target date funds (TDFs), the industry has overlooked a significant segment of participants that are actively making investment decisions, often ineffectively, across the DC menu in an effort to diversify and fine tune their risk profile.
"Qualified default investment alternatives, through the increased adoption of "autos" and TDFs, have steadily evolved with the Pension Protection Act, but core menu design has remained relatively unchanged leaving behind a subset of participants who don't believe investing solely in a single TDF is right for them," said John Galateria, Managing Director and Head of North America Institutional, Invesco. "While we believe TDFs are a good default option and an appropriate choice for many participants, particularly those who prefer not to actively manage their retirement investments, there is certainly room to evolve the current DC investment menu to address the needs of these Forgotten Participants that still want to feel in control of their investment decisions but may lack the knowledge to build an appropriate diversified portfolio."
The study includes in-depth interviews with 12 large plan sponsors as well as an online survey of an additional 97 plan sponsors. Plan sponsor respondents worked in the C-suite, treasury, human resources or on a retirement plan committee at organizations with at least 5,000 employees and DC plan assets of $250 million of more.
10 Participant focus groups were also conducted in five cities with an additional 2,001 participants surveyed online. Participants were ages 21 – 72, had a personal income of at least $30,000, and were currently contributing to a DC plan through full-time employment at an organization with at least 5,000 employees.
"Despite their best intentions, we also found some participants making financial decisions in their retirement plan with admittingly limited financial knowledge, which could be of significant fiduciary concern for plan sponsors," continued Mr. Galateria. "The addition of risk-based strategies can help strengthen a plan sponsor's fiduciary standing, and also provide a guard rail for participants who lack the time and knowledge to create a diversified portfolio from core menu options and rebalance regularly."
Key findings include:
1) There is a significant subset of participants who prefer more control in building their own portfolios and don't view investing in a single TDF as right for them. These participants intentionally allocate across TDFs and the core menu in an effort to diversify and fine-tune their risk level.
These are the Forgotten Participants that DC decision makers often overlook. They approach decision making with limited investment knowledge and often with overconfidence. This can lead to poorly constructed portfolios that may not be systematically rebalanced, properly diversified or in line with how much (or how little) risk a participant is willing to take.
- In an asset allocation exercise among focus group participants, only 6% invested in a single TDF.
- 71% of participants are/plan to be moderately to aggressively invested 10 years away from retirement. Many TDF glidepaths may not offer the amount of risk these participants want to take.
2) There is a healthy appetite among Forgotten Participants for a professionally managed solution tied to their investment risk profile.
This segment of participants in the study appreciates help in maintaining a level of investment risk appropriate to their needs and making investment decisions easier. To that end, a majority were interested in a suite of well-diversified, professionally managed options tied to risk tolerance, not just their time horizon.
- 65% of all participants felt that a risk-based solution would be a good fit for them, personally.
- 80% of higher income participants would invest in risk-based strategies.
- 64% of plan sponsors are interested in adding risk-based strategies to the investment menu as they allow participants to take the amount of investment risk that meets their needs; and feel they would be appropriate for a segment of their participant population and serve as a "middle option" between TDFs and the core menu.
3) There is substantial interest among participants and plan sponsors for a dynamic risk profile tool that helps with decision-making and increases engagement.
- 72% of participants would be likely to invest in risk-based strategies if simple, easy-to-understand resources are available to help them select the right strategy.
- For those who originally felt the strategies were not a good fit for them, 49% say they would likely invest in risk-based strategies if given these resources.
- 2/3 of participants are interested in an online tool to specifically help measure risk tolerance and suggest investment options.
Invesco is a leading global investment manager and a top provider of Defined Contribution solutions, managing more than $132 billion in DC assets, as of December 31, 2019. With a thoughtful insights platform, one of the broadest investment offerings, and a commitment to a superior client experience, Invesco is helping plan sponsors, advisors and consultants achieve optimized participant outcomes.
The "Forgotten Participant" study is part of Invesco's "ReDefined Contribution Plans" research series. To access the executive summary or request the full study please visit www.invesco.com/forgottenparticipant. To learn more about Invesco's defined contribution insights and solutions, please visit www.invesco.com/dc.
Together with Greenwald & Associates, Invesco connected with 110 plan sponsors and 2,001 DC plan participants (large employers with more than 5,000 employees) through online surveys, in-depth interviews and focus groups across multiple cities nationwide.
About Invesco Ltd.
Invesco is a global independent investment management firm dedicated to delivering an investment experience that helps people get more out of life. Our distinctive investment teams deliver a comprehensive range of active, passive and alternative investment capabilities. With offices in 25 countries, Invesco managed $1.2 trillion* in assets on behalf of clients worldwide as of December 31, 2019. For more information, visit www.invesco.com.
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Source for all data based on 2019 survey results, unless otherwise noted.
The opinions expressed are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Cited Invesco research is based on Invesco's work with Greenwald & Associates. Invesco is not affiliated with Greenwald & Associates.
A target-risk fund is a type of asset allocation fund that holds a diversified mix of stocks, bonds and other investments to create a desired risk profile. The fund manager of a target-risk fund is responsible for overseeing all the securities owned within the fund to ensure that the level of risk is not greater or less than the fund's target-risk exposure. A target-date fund identifies a specific time at which investors are expected to begin making withdrawals, e.g., now, 2020, 2030. The principal value of the fund is not guaranteed at any time, including at the target date.
Diversification does not guarantee a profit or eliminate the risk of loss.
Invesco Advisers, Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities. Invesco Distributors, Inc. is the US distributor for Invesco's retail products and private placements. Both are indirect, wholly owned subsidiaries of Invesco Ltd.
*AUM of $1,226.2 billion as of December 31, 2019
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