Posted on: Sunday, October 31, 2004
Fund owners aim at retirement
| • | Rule makes it easier to preserve 401(k)s |
By Meg Richards
Associated Press
NEW YORK — A recent survey found that mutual fund ownership is on the rise after two years of decline, an encouraging signal that Americans are starting to save more money. But although most investors say retirement is their No. 1 priority, experts say the vast majority remain in danger of shortchanging this goal.
According to a study by the Investment Company Institute, the lobbying group for the mutual fund industry, 48.1 percent of households own mutual funds, a slight increase over last year but still below the peak of 52 percent in 2001. The median balance of $48,000 represents about 47 percent of total household savings.
Retirement was the primary investment goal for 72 percent of fund owners surveyed, said Sandy West, the institute's director of market policy research. Some 84 percent participate in some sort of defined contribution plan, such as a 401(k) or government thrift, and 69 percent said they own an individual retirement account, up from 57 percent in 1998. For 58 percent of those surveyed, their first investment in mutual funds was made through their employers' defined benefit plan.
The institute does not evaluate whether people are saving enough for their goals. But financial planners say the data don't bode well for people who are planning on long, active retirements. Even people with substantially higher levels of savings are often surprised to find they haven't set aside an adequate amount, said Marilyn R. Bergen, a financial planner who specializes in retirement and estate planning in Portland, Ore.
"In general, people are not saving enough money. They are living in la-la land," Bergen said. "Unless you're talking about a portfolio of more than $3 million, I would say it's pretty common that financial planners are the bearer of bad news to a great many people."
Bergen and other experts say Americans often overestimate how much they'll see from the troubled Social Security system, and vastly underestimate how much they'll need for the future, by lowballing inflation, failing to take escalating medical needs into account, or just not doing the math. Some people believe if they pay the highest amount allowed into their 401(k) plan, they'll be covered, but in most cases, it just isn't so, Bergen said. As a result, many people may be unintentionally underfunding their own retirements by focusing on the 401(k) but not saving beyond it.
There is some good news. It takes discipline to save for such a far-off goal, and the institute's research suggests mutual fund holders are generally long-term investors. They own about four funds on average, having purchased their first one more than 10 years ago. And with the exception of automatic contributions, 60 percent have made no transactions over the last year.
"Shareholders exhibit a buy-and-hold strategy, even through a volatile market, from the bear market starting in March of 2000 through today, even after the scandals ... ," West said. "They are not nervous in volatile markets, and clearly that's an important message for new investors."
In September, about $9 billion flowed into equity funds and about $2 billion into bonds, according to Lipper. That's up from August, but still makes for a total of just $11 billion into long-term investments, Cassidy said. If there are 92.3 million mutual fund investors, as the institute estimates, that would equate to about $120 per person — well "below the latte level," Cassidy said, meaning it would barely cover a cappuccino a day for a month at your favorite coffee shop.
"It's not surprising, but it's very unfortunate," Cassidy said. "People have a tendency to only get excited when the market is doing great. But you should not let a short-term market downturn become another excuse to do nothing. The clock is ticking."
