Although market projections look strong, 49% of retirement plan participants are making more conservative investments and leaning toward a fixed income; however, they lack knowledge over its role in their portfolios, according to a new study by State Street Global Advisors.

“Plan sponsors need to recognize participants’ new conservative mindset and design a plan menu that helps them invest to meet their financial goals,” says Fredrik Axsater, senior managing director and global head of defined contribution, SSgA. “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.”

Still, the survey also shows signs of confidence as 79% of respondents who invested during the recession are contributing at least what they were five years ago. Another 76% of respondents report that their defined-contribution plans are as good or better than they were five years ago, and 78% of respondents believe the market will be the same or improve from what it is today in five years.

To make more conservative investments, respondents report that they are holding larger percentages in fixed income, though respondents also have a fundamental misunderstanding regarding how bonds play into their retirement. In fact, more than one-third of respondents believe bonds help minimize inflation, but they are actually susceptible to increases.

Approximately half of respondents do not believe bonds are lower risk than stocks, and 60% of respondents didn’t consider bonds for better portfolio diversification. Another 70% of respondents do not consider bonds to lessen volatility.

According to a previous SSgA study, retirement plan participants say they want automaticity and guidance to make decisions regarding their investments and overall retirement readiness.

“Our ongoing research into the attitudes and decisions made by plan participants continues to tell us that automaticity, plan design and engagement is the key to overcoming the impending retirement crisis,” Axsater says. “It is critical to understand the mindset of participants in order to build the right products that help them fund their retirement.

Notably, fixed income allocations within DC core funds and target date funds need to become more consistent with employee needs and preferences. A strong participant engagement program with action-oriented, clear communication can complement automaticity and strong plan design.”

With these survey findings in mind, SSgA recommends plan sponsors encourage participants to save more in light of market optimism and identify participants that don’t match their age-appropriate allocations in target date funds.

Plan sponsors should also work toward stronger core offerings and simplified plan menus as well as create communication strategies to tackle the misunderstandings about bonds. To help participants move their accumulated savings to more secure retirement income plans, plan sponsors should review their target date funds. 

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