The Principal Financial Well-Being Index^SM
Executive Summary - Fourth Quarter 2005

The Principal Financial Group^®, the nation's 401(k) leader, commissioned Harris Interactive^® to conduct online research with employees (ages 18+) of small and mid-sized (SMB) U.S. businesses (firm size 10 - 1,000 employees) about their attitudes and perceptions regarding their financial well being and their current employee benefits. Harris Interactive conducted The Principal Financial Well-Being Index survey of 1,213 employees from November 4-17, 2005. Data were weighted to be representative of the total population of adult employees who work for small or mid-sized U.S. businesses on the basis of age by gender, education, race/ethnicity, region income and propensity to be online. In theory, with probability samples of this size, one can say with 95% certainty that the overall results have a statistical precision of plus or minus 3 percentage points; however, this online sample was not a probability sample. This is one in a series of quarterly studies to identify and track changes in the workplace of small and mid-sized (growing) businesses. The first Principal Financial Well-Being Index^SM survey was conducted in the United States in 2000.

Summary of Key Findings

• Impact of Rising Home Heating Costs - Many employees in firms of 10-1000 will be making changes to their behaviors as a result of rising home heating costs. Home heating cost increases will cause half (51%) to lower their thermostats. One-third (33%) are planning to make their homes more energy efficient and approximately one in five (22%) will be saving on other expenses to be able to pay higher heating bills. All regions of the country are making changes, but the Midwest region is significantly more likely to be taking steps to deal with rising home heating costs than any other region of the country.
• Reduced Holiday Spending - Forty-four percent of employees in firms of 10-1000 will be spending less this holiday season due to higher energy prices and the impact of hurricanes and other natural disasters.
• Benefits - The availability of benefits has remained fairly consistent when compared to 4th quarter 2004. However, there has been a significant decline in the availability of the following benefits offered at 10-1,000 employee firms: Defined Contribution Plans, Disability Insurance and Tuition Reimbursement. Employees continue to rate health insurance as the most important benefit, followed by Defined Contribution Plans and then Defined Benefit Plans and Disability Insurance. Health insurance is the benefit most employees would like to see their company improve upon. Of the employees who have health coverage, 37% saw an increase in co-pays and 31% saw an increase in employee deductibles.
• Roth 401(k) and Roth 403(b) - Almost three in five (58%) employees in firms of 10-1000 have heard of the Roth 401(k) or Roth 403(b) and there is a high level of interest in it, with 72% saying they would be interested in it if their employer offered it. However, only 6% of the employees were aware that their employer was going to offer it in 2006. 69% of the employees whose company will be offering it in 2006 plan to participate)¹.

^{1) Small base. Data should be used directionally.}

Energy Prices

Economists have predicted an increase in energy prices as a result of the hurricanes. We asked employees what steps they plan to take, if any, in response to the forecasted energy price increases. Half (51%) of the respondents plan to lower their thermostat this winter. One-third (33%) are planning to make their homes more energy efficient. Approximately one in five (22%) will be saving on other expenses to be able to pay the higher heating bills. The Midwest region of the United States is significantly more likely to be taking steps to deal with rising home heating costs than any other region of the country. See Table 1 for details.

Eleven percent of employees have had to reduce their savings as a result of increasing energy prices, as seen in Table 2.

Table 1
"Many economists expect the cost of home heating oil and natural gas to rise significantly because of the Gulf Coast hurricanes. Have you or will you take any of the following steps in response to rising home heating costs? Please select all that apply."

Base: N=1,213 U.S. Adults age 18+

SIG= Significant at the 95% confidence level

Table 2
"Have you had to reduce your savings (e.g., 401(k) contributions) as a result of increases in energy prices?"

Base: N=1,213 U.S. Adults age 18+

Table 3
"Will the hurricanes and/or higher energy prices make you spend less this holiday season?"

Base: N=1,213 U.S. Adults age 18+

SIG= Significant at the 95% confidence level

• Significantly more people in the South say they will be spending less this holiday season than the people in the West.

Natural Disasters

2005 has seen many natural disasters affect people all around the world. We wanted to see what impact it has had on employees in firms of 10-1000 employees. The majority (85%) said they didn't change their financial behavior at all as a result of the natural disasters. As illustrated in table 4, there are no statistically significant differences between regions of the country.

Table 4
"Did the recent series of natural disasters (Hurricanes Katrina, Rita Wilma, earthquakes in Pakistan) make you alter your financial behavior in any of the following ways? Please select all that apply."

Base: N=1,213 U.S. Adults age 18+

Benefit Programs Offered at Businesses with 10 to 1,000 Employees
The top benefits offered at firms with 10 to 1,000 employees are Health Insurance (88%), Life Insurance (65%), Defined Contribution Plans (64%), Free Parking (57%) and Disability Insurance (48%). In table 5 below, comparisons can be made with the previous year's benefit offerings. There are some significant differences between responses from this most recent quarter and 4th quarter 2004 - indicated with "SIG" below.

Table 5
"What types of benefit programs (excluding vacation and holidays) does your company currently offer you? Please select all that apply."

SIG= Significant at the 95% confidence level

Benefit Satisfaction
Upon identifying what benefits they are offered through their employers, employees were asked to rate their satisfaction with some of the major benefits. Employees are most satisfied (rating of 8-10 on a 10 point scale) with their Defined Benefit Plan (62%), Defined Contribution Plan, (54%), Disability Insurance (48%) and Stock Options (46%). In comparing this quarter's results with the previous year, there are significant decreases in satisfaction levels for Life Insurance and Profit sharing/Bonus plans.

Table 6
"Please indicate how satisfied you are with each benefit program."
(rating of 8, 9 or 10 on a 10 point scale)

SIG= Significant at the 95% confidence level
** Sample size varies by benefit offered

Benefit Importance
All employee respondents were asked to rate a group of benefits in terms of how important it was to them on a 10-point scale with 10 being "Very Important." As seen in Table 7, many benefits have had a significant change from 4th quarter 2004.

Table 7
"Please indicate how important each benefit program listed below is to you."
(rating of 8, 9 or 10 on a 10 point scale)

SIG= Significant at the 95% confidence level

Each employee respondent was asked to identify what benefits they would most like their employers to offer, aside from those already offered. Defined Benefit Plans top the list with 18%, followed by Profit Sharing/Bonus with 12%.

Table 8
"Which one employee benefit do you most wish that your company would offer you (excluding vacation and holidays)?"

Aside from those benefits employees would like to see added to their employer's benefit programs, they were also asked to identify what benefits they would like to have improved upon. The top two benefits mentioned are Health Insurance (45%) and Defined Contribution Plan (14%). See table 9 for additional detail.

Table 9
"Which one employee benefit (excluding vacation and holidays) do you most wish that your company would improve upon?"

Health Coverage Changes

As noted above, health insurance is the top benefit employees would like their employer to improve upon. To better understand what types of changes employees have seen recently in their health coverage, employees were asked to select from a list those changes they've seen in the past 12 months. As illustrated in table 10, the largest proportion of employees saw an increase in employee co-pays (37%) and increased deductibles (31%).

Table 10
"Over the past 12 months, has your employer made any of the following changes in your health care coverage?"

Base: U.S. Adults age 18+ (employees with health insurance)

Benefits for Recruit & Retention
Firms with 10 to 1,000 employees offer employee benefits to aid in the recruiting and retaining of quality employees. To measure how employees react to the presence of good employee benefits a series of agree statements were asked. There was a significant decrease in the proportion of employees who agree that a good employee benefits plan encourages them to work harder and perform better. The proportion of employees who agree that the company they work for is concerned about their long-term financial future has also significantly declined. - see table 11.

Table 11
"Please indicate the extent to which you agree or disagree with each of the following statements."

SIG= Significant at the 95% confidence level

Employee Financial Well Being
In measuring employees' attitudes and perceptions about their financial well-being, a series of different questions were asked of them. First they were asked to identify how much they agreed with some statements relating to how concerned they are about their long-term financial future and how happy they are about their current well-being. As seen in table 12, the percentage of employees who are very concerned about their long-term financial future has declined significantly from last year. However, a significantly smaller proportion of employees than the previous year agree they are extremely happy about their current financial well-being.

Table 12
"Please indicate the extent to which you agree or disagree with each of the following statements."

SIG= Significant at the 95% confidence level

Job Security
Job security continues to top the importance chart when compared to long-term financial future and challenging work and it has increased significantly since last year. The importance of challenging work has seen a significant decline since 4th quarter 2004.

Table 13
"Please rank the following items in terms of how important it is to you."

SIG= Significant at the 95% confidence level

Investment Changes
Changing market conditions can spur some individuals to make changes to their investments. To measure what type of changes employees are making, they were asked to identify if and how they are moving their retirement savings. Based upon response, 77% of employees who have retirement savings are not making changes to how their investments are invested while 23% are - 15% to stable and 9% to volatile. There was a significant decline in the proportion of people moving money from volatile investments to stable investments for this year when compared to last year and a significant increase in the people not making any changes.

Table 14
"Given the current stock market and economic conditions, have you made changes in how you have your retirement savings invested?"
N= (base - those with retirement savings)

Tools to Help You Save for the Future
There was a significant decline in employees who are satisfied with the tools provided by their employer-sponsored benefit programs and significant increases in neutral and dissatisfied responses.

Table 15
"Overall, how satisfied are you with your employer-sponsored benefit program in providing you with the tools you need to save for your future?"

SIG= Significant at the 95% confidence level

Roth 401(k) and Roth 403(b)
Roth 401(k)'s and Roth 403(b)'s are an option employers can provide to their employees if they choose. Employees were asked a series of questions to help us better understand public awareness, availability and perception of the Roth 401(k) and Roth 403(b). As seen in Table 16, almost three in five (58%) have heard of a Roth 401(k) or 403(b) prior to this survey. Table 17 shows there is a high level of interest in the Roth 401(k) or 403(b) with 72% saying they would be interested if their employer offered it.

It does appear from Table 18 that few employers will be offering it next year with only 6% of the employees being aware that their company will make it an option. 69% of the employees whose company will be offering the Roth 401(k) or 403(b) plan to participate.

Table 16
"Beginning January 1, 2006, participants can designate a portion of their elective deferral contributions to a 401(k) or 403(b) plan as after-tax Roth elective deferral contributions that are includable in gross income. At qualified distribution, the Roth contributions, including earnings, are tax-free. It is up to your employer to decide whether or not to offer the Roth 401(k) or 403(b) option.

Prior to this survey, had you ever heard of a Roth 401(k) or 403(b)?"
Base: N=1,213 U.S. Adults age 18+

Table 17
"Does the Roth 401(k) or Roth 403(b) sound like something you would be interested in, if it were offered by your employer?"
Base: N=1,213 U.S. Adults age 18+

Table 18
"Is a Roth 401(k) or Roth 403(b) something your employer will be offering in 2006?"
Base: N=1,213 U.S. Adults age 18+

Table 19
"Do you plan to participate in the Roth 401(k) or Roth 403(b)?"
N= 67* (base - those whose employer will be offering in 2006)

* Small base. Data should be used directionally.

Table 20
"How would you prefer to be educated about the Roth 401(k) or Roth 403(b) option if it were available through your employer? Please select all that apply."
Base: N=1,213 U.S. Adults age 18+