Even small changes in asset allocation can have a significant impact on employees’ ability to retire comfortably when they want. Yet few organizations pay attention to how their employees allocate their defined contribution (DC) plan contributions and current assets.
The latest publication in Sibson Consulting’s series on various aspects of retirement readiness focuses on how employers can use targeted internal communications and other tactics to help their employees understand asset allocation and empower them to make better choices.
“Most employees find asset allocation extremely confusing. Left to their own devices, they may make less than ideal decisions,” noted Jonathan Price, vice president with Sibson. He added, “This can include adjusting their allocations at the wrong time, chasing returns, not responding to changes in their lives and investing too much in stable-value funds or company stock.”
To show the impact of asset allocation, Sibson examined a hypothetical 25-year-old employee who defers $5,000 annually to her DC plan. If she had started investing in a target date fund (TDF) in 1977 (assuming TDFs had existed then), she would have earned only a marginally better return (3 percent better) than if the investments were in a 50/50 equity/fixed-income balanced fund. However, she would have fared far better (31 to 34 percent better) under either of those alternatives than if she had invested fully in a fixed-income fund, as illustrated by the following graph.
Sibson works with plan sponsor data to provide detailed analytic reports that identify individuals and cohorts that fall into the following categories (and others):
Sibson finds that regular, targeted education and communications that focus on the participants’ own retirement-income goals can be the best solution. One example is an Individual Retirement Readiness Statement. One-on-one meetings, broader campaigns and modeling software can also be effective.
To speak with one of our consultants about how organizations can improve their employees’ retirement readiness, please contact Erin Burns.
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The Segal Group (www.segalgroup.net) is a private, employee-owned consulting firm headquartered in New York and with more than 1,000 employees throughout the U.S. and Canada. Members of The Segal Group include Segal Consulting, Sibson Consulting, Segal Select Insurance Services, Inc. and Segal Marco Advisors.
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