The reason American workers sign up for a defined contribution plan from their employer is because they are thinking about their retirement and are hoping the funds that are invested in a DC plan grow to the point they make retirement a bit more comfortable.
But signing up for a defined contribution plan through your employer is an indication that you are worried about your savings and other retirement income streams enough that you want the extra cushion that comes from a 401(k). It is easy to understand, then, that defined contribution plan participants do not see themselves as wealthy individuals.
Spectrem’s DC market insights study Financial Behaviors and the Participant’s Mindset examines how defined contribution plan participants feel about investing, retirement, health, issues of national interest and wealth. The responses participants provide regarding their wealth status indicate that the average plan participant considers themselves to be average Americans in terms of their wealth status.
The Spectrem study asks the questions directly. Asked to place their wealth status on a 0-to-100 scale, with “100’’ meaning more wealthy, plan participants placed their wealth level at 50.15, obviously as close to the midpoint as possible. It is a slight increase above last year’s similar rating of 48.99.
But the 50.15 rating is below the rating of Mass Affluent investors with a net worth between $100,000 and $1 million surveyed in Spectrem’s wealth segmentation series study Financial Behaviors and the Investor’s Mindset from the same time period. While there are plan participants in the study with more than $350,000 in their defined contribution plan, as a group the plan participants have a lesser image of their wealth status than investors overall.
The fact plan participants have a lower respect for their own wealth status could certainly provide a stepping stone to a relationship between the participant, the plan provider or a financial advisor, with the opportunity to examine and explain the participants’ current wealth status.
The wealth status question was further examined by segmenting plan participants by age. Millennials, those under the age of 36, rated themselves at 48.87, while the next generation, named Generation X, rated themselves at just a bit higher, 49.01. The rating climbed to 51.75 for Baby Boomers and 52.87 for World War II plan participants. With the exception of the World War II investors, the ratings were all slightly above the rating taken one year before.
Female plan participants rated themselves slightly lower than male participants did, 47.61 to 52.84. Historically, females tend to have a lower opinion of their wealth status than men.
It makes sense that the size of a plan participant’s account would also affect their wealth status determination. Those with less than $10,000 rated their wealth status at 43.69, while those with more than $100,000 in their account rated themselves at 54.79 and those with more than $350,000 rated themselves closer to 60.00.
The fact that plan participants do not see themselves as overly wealthy may explain why they are less likely than other investors to seek professional financial advice. Only 17 percent of plan participants consider themselves dependent at any level upon financial advisors, and more than 60 percent have almost no contact with a financial advisor.
In many cases, investors who do not use financial advisors do not do so because they do not believe they have the assets to warrant the expense and time of working with a financial advisor. That would correspond to their attitude toward their own wealth level.
Plan participants concern themselves with their financial situation heavily. Sixty-two percent report worrying about whether they will be able to retire when they want to, 57 percent worry about maintaining their current financial position, and almost half worry about the financial situation of their children and grandchildren.
Top Takeaways for Advisors
If advisors have the opportunity to address plan participants, they can provide some comfort by assessing the participant’s wealth status and provide input in ways to grow their assets to a more comfortable level.
©2017 Spectrem Group