Even after nearly a decade of intensive investment education efforts by plan sponsors and vendors, a new survey reveals that participants are still in the dark about their investments. As more and more effort, time, and money are spent educating plan participants it is worth taking a step back and asking a simple question: Is it all working? Every couple years John Hancock Financial Services takes this step back with its Defined Contribution Plan Survey.

The Survey

When:January 1999

By:Mathew Greenwald & Associates

How:Telephone survey of 801 randomly chosen 25 to 65 year olds. Currently contributing to their employer's retirement savings plan --- and who had a choice of investment options.

Demographics:Slightly more than half male; Average salary is just over $50,000. Average age is 42; Slightly less than half have at least a college degree, Almost three-fifths are covered only by the retirement plan covered in this survey.

The 1999 version of the survey was unveiled at GIC's '99 in Scottsdale by Wayne Gates, general director at John Hancock. Because of the forum, Gates interpreted the survey's findings with a bias towards fixed income.

Gates noted that when one looks at the survey results over time (this is the sixth survey) encouraging trends on the equity side appear. On the flip side, the trends on the fixed income are "actually pretty disturbing", said Gates, which creates a "good news/bad news" situation. He added that "on closer examination, even the encouraging trends on the equity side may not be sustainable."

Gates pointed out that two backdrops have had a significant effect on participant's knowledge. First, investment education has sought to make participant's asset mix more aggressive by touting equity's long-term returns. The second influence has been the 8-year economic expansion, and accompanying record-setting performance in the stock market.

Based on participants' responses in the survey, and the general skill and understanding of investments among participants that it reveals, Gates believes that the economy and stock market are responsible for much of the change in asset allocation from fixed income to equities.

As a result participants may be in for a fall. "If the stock market turns around, individuals are poised to make some pretty costly mistakes," Gates worries.

The Plan Funds Participants Use
Option	Participants Using
Domestick Stock	73%
Money Market	36
Int'l Stock	35
Company Stock	34
Domestic Bond	27
Stable Value	25
Balanced	23
Gov't Bond	19
Lifestyle	3
Source: John Hancock Finanial Services Sixth Defined Contribution Plan Survey

 

Investments Used
Three of the four most frequently utilized funds are stock-based. Diversified domestic stock funds are by far the most frequently used option, and more than twice as likely to be used than the first runner-up, money market funds. Amazingly that diversified international or global equity funds are now the third most frequently used option. Only 25 percent of respondents use stable value options. Considering the string of back-to-back strong years that the stock market has turned in, it also should come as no surprise that the survey has found the average amount participants believe they should invest in stocks has risen. This "ideal" allocation to stocks has risen to 47 percent in 1999 from 38 percent in 1993.

"Participants' willingness to invest increasing amounts in equities comes even though they are aware that stocks are the riskiest class of investments in their retirement plan," said Gates. Just how risky participants believe stocks to be is reveale in the table below. A "1" indicates participants believe there is no risk and a "5" indicates very high risk.

Gates points out that participants continue to rank company stock as lower risk than the diversified stock funds.

"The risk rankings of the fixed income funds have always been pretty interesting," said Gates. "Respondents have generally perceived both money market funds and bond funds to have about the same amount of risk, as they do here. Prior to this survey, participants always ranked stable value as the lowest risk investment option, but that distinction now goes to government bond funds."

Participants' View of Risk
Option	Risk Rating (1=low, 5=high)
Int'l Stock	4.0
Domestick Stock	3.7
Company Stock	3.1
Lifestyle	3.1
Balanced	2.7
Money Market	2.4
Domestic Bond	2.3
Stable Value	2.0
Gov't Bond	1.9
Source: John Hancock Finanial Services Sixth DC Plan Survey

 Despite the efforts of plan sponsors, plan vendors, and the media, participants knowledge about investments appears to be declining. This is shown most dramatically in the questions Hancock asked about fixed income investments.

Participants say that they have grown less familiar with fixed income over the past four years, and they report that they are less likely to use fixed income investments than four years ago.

In every other John Hancock survey, stable value was the most frequently used of the fixed income options. It has now fallen to third. One reason for the decline is that fewer plans offer stable value. In 1997 52 percent of participants had access to stable value and 36 percent used used the option. This year, only 46 percent have access and only 25 percent use it.

When asked what investments are found in a money market fund, only half said the correct answer, short-term securitiesm and only 13 percent knew that they invest only in short-term securities are allowed in a money market fund.

Meanwhile, nearly half (49 percent) believe that money market funds contain bonds, and 41 percent think they include stocks. This bleak results are acutally an improvement over prior survey results, said Gates.

Best Time to Buy Bonds
Event	Percent Choosing
Rates Decrease	17%
Rates Increase	36
Remain Stable	8
Doesn't Matter	16
Don't Know	22
Source: John Hancock Finanial Services Sixth DC Plan Survey

 Another question tests participants' understanding of the relationship between bond prices and interest rates. "When is the best time to transfer money into a bond fund? When interest rates are expected to increase, decrease, remain stable, et cetera?"

Gates reports that fewer answered this question correctly than in years past. In prior surveys about a quarter answered the question correctly. (The correct answer is when interest rates are expected to decrease). This year only 17 percent chose correctly.

Interestingly, Gates points out that respondents are more than twice as likely to choose the wrong direction of interest rates.

Participants are no better at answering another set of questions asked whether it is possible to lose money investing in various kinds of funds.

On the plus side, 85 percent of participants realize that you can lose money investing in stocks. Of course, that means that 15 percent don't.

Can You Lose?
Option	Percent Saying "Yes"
Stocks	85%
Bond Fund	45
Gov't Bond Fund	30
Stable Value	23
Source: John Hancock's Sixth DC Plan Survey

Meanwhile, only 45 percent of participants understand that market value is at risk when they invest in a bond fund. Even more surprising, only 30 percent realize this to be true in a government bond fund.

"These responses are another indication that most people don't understand the concept of interest rate risk. It's also likely that individuals equate the term "government" or "treasury" with safety of principal from all sources of risk," says Gates.

Finally, almost a quarter of respondents think they can lose money invested in stable value. Add in those that don't know whether they can lose money and more than one-third of respondents don't understand the book value aspect of stable value.

Hancock also asked participants which investment, money market funds or stable value and money market funds or bonds, earns more over a ten-year investment horizon. In both cases participants chose money market funs.

Gates speculates that one reason that so many believe that money market funds will earn more than either stable value or bonds is that more than 40 percent think money market funds invest in stocks.

Participants' Reaction to a Market Slide

Would you change your equity investment strategy if the stock market declined ...
Action	10%	Up to 20%	Up to 30%	More than 30%
Yes	32	55	75	84
Transfer funds out	22	38	50	55
Allocate less in future	17	30	41	46
Transfer funds in	5	7	10	12
Allocate more in future	5	11	13	14
Source: John Hancock's Sixth Defined Contribution Plan Survey

Hancock asked stock investors how they would change their stock investment strategy if stock prices declined by 10 percent, by 20 percent, by 30 percent, or by some amount in excess of 30 percent.

Not surprisingly, participants show themselves to be poor market timers in theory. Remember, this question was a hypethetical one and does not measure what they do when actual dollars are on the line in situations such as last Fall's 20 percent decline.

Participants' most likely actions are to transfer funds out of stocks and to allocate less to stocks after the decline.

Very few say they would see the drop as a buying opportunity and transfer funds into stocks or allocate more to stocks in the future.

This seems to confirm another behavior uncovered by the survey. Over the years, the share of their retirement money that people believe should be invested in stocks has been on the rise, and the share that they believe should be invested in the principal safe investments has been on the decline.

In other words as stock prices have risen, participants have increased their ideal allocation to stocks.
As a follow up, Hancock asked whether people actually held their ideal amount in both stocks and the safe investments. Hancock then asked those saying "no" whether they had more or less invested in each asset class.
As one might expect, the trend participants have invested more than the appropriate amount in stocks and less than the appropriate amount in the safe investments. This suggests that participants' asset mix may have become even more aggressive than they desire. Gates speculates that it may be the result of participants not rebalancing their portfolios.

He adds that it is also indicative of a couple of other mindsets: first it shows an investment strategy that's been set on auto-pilot; and second it reveals a "let it ride" philosophy of leaving the stock winnings on the table.

Gates worries that taken as a whole, the survey results suggest that participants are poised to make some very costly mistakes. To prevent these mistakes who suggests vendors and plan sponsors take a number of actions.
First, says Gates, is to continue the investment education process, but with the focus on reasonable return expectations for all asset classes and educating about the benefits of diversification and portfolio mix.

Second, he points out that many employers are offering professional financial planning services to plan participants. Yet many participants do not use these services -- even when they are offered free of charge. Nearly two-thirds (65%) of respondents to Hancock's survey reported that their employer offered these services. Unfortunately less than half of those who have access actually use them, Gates said.

"This benefit should be recognized and encouraged so that it is offered even more frequently. But if participants don't use this service, it won't help." 

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