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Survey Finds Savings Burnout Among Boomers

November 29, 2006

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Overwhelmed with too many choices, turned off by complex prospectus language and not sure who to turn to for advice, many Californians in their prime savings years are falling behind in the retirement funding race, according to a survey of Californians released by AARP Financial.

"Investing for retirement has been made unnecessarily complex, confusing and time-consuming," said Nancy M. Smith, vice president of Investment Services at AARP Financial. "In response, many investors save too little, too late or too sporadically. Others throw up their hands in frustration and stop saving altogether."

From Baja to Berkeley, Californians are under-saving. The survey of 500 California residents age 50-plus found that 36 percent of pre-retirees saving for retirement have accumulated less than $100,000.

"Our survey looked at Californians who are already saving for retirement," Smith pointed out. "When you look at the general population, the picture is even more discouraging."

The survey of 500 California residents was conducted via the Internet between Oct. 4 and Oct. 16 by Data & Management Counsel, Inc. Participants had to be at least 50 years old, have money saved for retirement and own mutual funds in their retirement portfolio. The margin of error for the 500 interviews is plus or minus 2 to 3 percent.

Confusion

Fifty-four percent of the Californians surveyed think investing is too complex for the average person and many cite product design and industry practices as a source of confusion.

Reflecting the fact that investors are overwhelmed by too many investment choices, the state of California recently reduced the number of funds offered in its 401(k) and 457 savings plans from 20 to 15 in an effort to help participants "focus on an asset allocation approach."

"Research suggests that the fewer investment options in a retirement savings plan, the higher the participation rate," Smith observed.

The survey findings suggest that poor communication is also an issue for many investors.

More than three-quarters of Californians surveyed believe that a car insurance policy, instructions for a DVD player and prescription drug inserts are easier to understand than a mutual fund prospectus. Not surprisingly, then, only a third of those surveyed said they read "all or most" of a prospectus before buying a fund.

"Too many of us take more time to read the ingredients on a cereal box than we do to read a fund prospectus," says Smith. "Who can blame them? Even with all the attention paid to language simplification, many fund company prospectuses are hardly user-friendly. As a result, many investors take action without reading the prospectus at all. Investors need quality, not quantity, of information."

Most investors would like help with their retirement portfolios but aren't sure where to turn. More than half of investors surveyed believe that mutual fund companies put their own interests before those of their investors. Six out of 10 wish there was someone they could talk to about investing who "isn't trying to sell me something."

Fees and Expenses

Despite the fact that fees can have a tremendous impact on returns, many investors don't check or don't know how to check, mutual fund fees. Two out of five California fund investors surveyed are "unaware" or "not sure" of the fees they pay for their mutual funds.

"When it comes to fees and expenses, ignorance is loss, not bliss," Smith said. "The difference in cost between a low-cost fund and an average-cost fund is about 60 to 70 basis points a year. The amount saved applied against a portfolio invested over 20, 30 or more years may cover years more of living expenses in retirement."

"Investors are led to believe that they should pay for active management. But studies show that most market indexes historically outperform most actively managed mutual funds over the long-term," says Smith. "Investors who pay managers to beat the market frequently turn out to make a losing and expensive bet."

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