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Amid high inflation and rising interest rates in 2022, retirement planning has become a minefield for advisors and clients alike with the latter group increasingly distressed about their retirement outlooks due to what’s turned out to be an unexpectedly hostile macroeconomic environment.
Indeed, attitudes and outlooks regarding the state of retirement planning are somewhat gloomy at the moment, but there is some constructive news for advisors. Notably, clients remain engaged with employer-sponsored retirement vehicles, including 401(k) plans. That’s a sign they’re investing for the long-term and not being tossed out of the market simply because 2022 is a disappointing.
Additionally, dedication to contributing to 401(k) plans is positive for advisors because with tens of thousands of workers retiring every month, that’s a lot of people converting 401(k)’s to individual retirement accounts (IRAs), meaning a lot more folks need and want the assistance of registered investment advisors (RIAs).
As is often noted, advisors need to be more aware of demographic trends and tailor advice and relationships to specific groups. That includes the overlooked goldmine that is Gen X. Nearly two-thirds of that group are stressed about retirement planning and half feel they’re behind on retirement savings. But there’s more to consider at the demographic level.
EBRI/ICI Survey Is Important, Revealing
A recent survey by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) sheds important light into 401(k) behavior.
“Our research finds that younger 401(k) plan participants today are much more comfortable holding a significant portion of their savings in equities,” said Sarah Holden, ICI Senior Director of Retirement and Investor Research. “At year-end 2020, nearly 80 percent of 401(k) plan participants in their twenties had more than 80 percent of their account balance invested in equities, compared with less than half prior to the global financial crisis.”
The survey also reveals that younger 401(k) participants are more heavily invested in equities while older workers lean more on balanced funds, including target date products, which increase exposure to bonds with each passing year.
That’s as it should be and it is positive for advisors because it shows some clients come equipped with sound fundamentals and those are the type of clients that are most receptive to guidance. That much is highlighted by the popularity of target date funds among workers.
“At year-end 2020, 86 percent of 401(k) plans, covering 87 percent of 401(k) plan participants, included target date funds in their investment lineup,” according to the survey. “Target date funds were 31 percent of the assets in the EBRI/ICI 401(k) database, and 59 percent of 401(k) participants in the database held target date funds. Also known as lifecycle funds, these funds are designed to offer a diversified portfolio that automatically rebalances to be more focused on income over time.”
Younger Demographics Need to Get to Work
As noted above, younger generations are fertile ground for advisors to work with when it comes to retirement because data confirm many aren’t taking advantage of employer-sponsored plans.
“At year-end 2020, 38 percent of 401(k) plan participants were in their twenties or thirties, and 24 percent were in their forties. Forty-three percent of 401(k) plan participants had five or fewer years of tenure, including about one-fifth who were recent hires (two or fewer years of tenure),” noted the survey.
Those numbers are decent, but not great and imply advisors have plenty of runway with which to work with Gen X, millennials and Gen Z regarding retirement strategies because many members of those generations will not receive defined-benefit pensions and the future of Social Security is very much up in the year for younger workers.
Related: The Client Is Not Always Right