Half of default fund members chose this investment option

Nearly half (49%) of respondents in their defined contribution (DC) pension scheme’s default fund chose to be there and did not actually ‘default’ into it, according to research by State Street Global Advisors, the asset management business of State Street Corporation.

Its research, which surveyed 1,002 full-time employees belonging to their employer’s DC pension scheme, found that nearly a quarter (24%) believe their default fund offers secure savings, while one in 10 thinks the fund provides guaranteed returns.

The research also found:

  • 26% of respondents chose the default fund because it was recommended to them by their pension provider or employer.
  • 22% of respondents chose the default fund because the investment options were attractive.
  • 34% of respondents feel they will be worse off than their parents in retirement.
  • 10% of respondents in a default fund said they understand fully how these funds work, while 36% said they somewhat understand and 42% said their knowledge here is ‘slight’.  
  • 12% of respondents said they have no understanding at all about their default fund.
  • 8% of respondents invested in the default fund said they had no choice but to choose that option.

Nigel Aston (pictured), managing director and head of UK defined contribution at State Street Global Advisors, said: “Default funds play a critical role in DC by taking away difficult investment decisions and leaving workplace savers free to address the questions they are better equipped to answer, [such as] ‘How much should I save and when do I retire?’

“Only a small minority admits to having a good understanding of how the default fund is invested. While it is important to have engaged savers, we believe more effort should be put into designing better default funds.

“The main reason given by those investing in their employer’s DC default fund (67%) was the belief it offered balanced risk. There is a clear opportunity here for employers and their advisors to provide greater help in this area and ensure the default fund is fit for purpose.

“We look forward to the next generation of default funds that will balance risk, return and cost with governance embedded, solutions that are intuitive to the user but dynamic and responsive in nature.”