The Unknowns in Retirement Accounts


 According to US Census data from 2017, 79 percent of Americans have access to a 401(k) or similar retirement account through the employer they work for.  This is typically one of the most common ways many investors receive their first introduction into investing and saving for retirement.  When an investor leaves a company and moves to a different employer, sometimes those investors elect to take their employer sponsored defined contribution plan and roll it into an IRA.  Given that these accounts are often the first glimpse into investing for many investors, what do wealthy investors know about retirement accounts and what is still unknown?


Sixty-three percent of wealthy investors have employer sponsored defined contribution accounts like a 401(k) or similar. This percentage is up from the end of 2019, when it was 60 percent.  Among wealthy investors the mean value of those accounts is $558,000 according to recent Spectrem Group research that analyses the portfolios of wealthy investors.  Over half of investors also own Contributory IRAs, Rollover IRAs, and Roth IRAs.  Only Rollover IRAs have a higher mean value than defined contribution plans at $599,000.  Millennials are the most likely to have an employer sponsored defined contribution plan, with 95 percent of those younger investors owning that type of account.  Younger investors are also more likely to own Roth IRAs.


The asset allocation of retirement accounts has not changed significantly from the end of 2019 to 2020.  Percentage ownership in short-term investments and fixed income has gone down slightly, while alternative investments have gone up slightly and equities remained similar.  Despite a lack of significant changes within the asset allocation, values within the accounts have gone down since December 2019 in all retirement account types.


Now to the unknown components of retirement accounts.  A quarter of a retirement account asset allocation is unknown by the investor.  That percentage of portfolio that the investor is unaware of how it is invested jumps up to 39 percent for those investors with $100,000-$499,999 in net worth.  For those investors who are Advisor-Dependent, they are unaware of what 42 percent of their portfolio is invested in.  Financial advisors need to explain to clients how their retirement accounts are allocated, and provide more education around investing.  Another study Spectrem Group conducted recently examined the knowledge level of millionaire investors, and the study revealed that 47 percent of millionaire investors can’t pass a basic investment knowledge test.  Investors need to seek out information and education, and the best source of information for most people is their financial advisor.

Another unknown that 30 percent of investors are facing is if they will need to delay retirement as a result of low interest rates that have been around for many years.  Thirty-seven percent of working investors are worried or very worried about being able to generate income from investments, leading to a higher level of uncertainty regarding the ability to replace their income in retirement.  Fifty-eight percent of investors have spoken to their financial professional about these concerns, but 42 percent have not.  This is an opportunity for financial professionals to provide much needed guidance, so investors face one less uncertainty.