For many of the Americans who have employee-hosted or sponsored retirement plans, signing up for the 401(k) is the extent of their investing functions. The rest of their money is either spent or placed within some sort of simple savings account.
There are some investors who step out beyond their defined contribution plan and use other funds to make more complicated investments, but research indicates that DC plan participants are often not the sort to get involved in more complicated or riskier investment products and vehicles.
Understanding the investment intentions, habits and behaviors of Americans with defined contribution plans is the function of Spectrem’s unique studies into plan participants. Americans with defined contribution retirement plans often carry different liabilities and financial responsibility than other investors and their investment decisions can be limited as a result.
Spectrem’s segmentation study on affluent plan participants details the average level of investment knowledge and advisor usage among DC plan participants. Financial Behavior’s and the Participant’s Mindset cover many angles of a plan participant’s investment attitudes and behaviors.
“There are plan participants who go beyond their defined contribution employee-sponsored retirement account and invest other funds in other products,’’ Spectrem president George H. Walper Jr. said. “This study is designed to assist advisors in understanding those investors as well as those plan participants who currently do not invest beyond their 401(k)s but may eventually decide to do so.”
More than half of the plan participants surveyed for the study have less than $50,000 in their defined contribution accounts. However, 14 percent have more than $350,000 in their plan, so the study does cover a wide range of respondents from a retirement account standpoint.
It is revealing to show how plan participants compare to affluent investors in general in terms of their knowledge of finance and investing. According to Spectrem’s study of the general population of investors, Financial Behaviors and the Investor’s Mindset, 83 percent of Millionaire investors with a net worth between $1 million and $5 million consider themselves to be fairly or very knowledgeable about financial products and investments. Only 60 percent of plan participants have that same level of confidence in their knowledge, a much lower percentage, indicating that plan participants are not as involved in the investment world.
Plan participants are also not as involved as other investors in an advisor-investor relationship. Only 17 percent of plan participants express a level of reliance upon a financial advisor, exactly half the percentage of advisor reliance among the Millionaire population (34 percent).
Despite a lack of knowledge and advisor usage in comparison to Millionaires, plan participants do worry about financial issues. The Spectrem study reports 67 percent of plan participants have concerns over tax increases, 60 percent are concerned about the low interest rates on savings and on inflation, and 59 percent worry about how the stock market performs.
All of this screams to plan providers that there is a market of potential clients who can move beyond their defined contribution plans to other forms of investment. Plan providers should find new and influential ways to educate plan participants about various types of investments and how those investments relate specifically to each participant and his or her future.
It is believed that plan participants would accept assistance in investments outside their retirement plan but do not believe their asset level warrants the attention or that such advice would be prohibitively expensive. Their reticence to become engaged with advisors is in contrast to their concern over getting the advice they need for the task of reaching their financial goals.
Only approximately 30 percent of plan participants say they are currently receiving the help and advice they need for their financial planning. As plan participants age, that percentage drops, and only 30 percent of Baby Boomers believe they are getting adequate assistance on financial planning.
However, among plan participants who do work with financial advisors, they credit those professionals with being as helpful in making financial decisions as their spouse. This reflects the concept that those plan participant with a financial advisor appreciate the assistance they get, which should serve as impetus to other participants to sign on with financial advisors.
Many of the plan participants do get financial advice from a non-human source: the website of their employee-sponsored retirement plan. Forty percent report using the website articles for retirement planning advice, and 28 percent use it for investment research.
Top Takeaways for Advisors
The entire retirement study seems to indicate that plan participants under-utilize the resources available to invest outside of their defined contribution plan. Approximately 30 percent of plan participants say they use the company that manages their retirement account to manage other assets.
There are opportunities for financial and advisory firms competing in this market. At the same time, however, it also places a responsibility upon the industry to recognize that participants are seeking help, and many do not know where to go to receive that help. Financial providers and advisors must work to educate these investors to allow their retirement outcomes to be the best that they can achieve based upon their current circumstances. While the immediate payout may not be great for providers, the ability to develop long-term loyalty and to demonstrate expertise is available to advisors and financial firms ready to effectively help plan participants.
©2017 Spectrem Group