Trending
Written by: Jennifer DeLong and Heather Balley
From managing credit card debt to balancing a checkbook, even basic financial decisions aren’t always easy. Investing for retirement can be even more challenging. Most people try to tackle retirement readiness themselves, but only a few have the acumen for it—a mismatch we believe plan sponsors can help realign.
About 45% of defined contribution (DC) plan participants make retirement investment decisions on their own, according to our latest proprietary survey, Inside the Minds of Plan Participants. While 28% of participants work with a financial advisor, the preference for “do it yourself” retirement planning doesn’t square with many participants’ financial savvy, our findings show.
Basic Questions, Questionable Answers
As part of the survey, we posed a handful of questions to gauge participants’ understanding of key financial topics. Subjects covered some basics, such as how simple interest adds to savings; other topics were a bit more complex but pertinent, like the effects of interest-rate changes on bond prices. Only 13% answered all six questions correctly (Display), suggesting that plan sponsors may have their work cut out for them if most participants insist on staying hands-on.
The quiz also found differences among age groups and genders, highlighting some groups that need more help than others. For instance, those under 35 years old scored much lower than older workers, while the percentage of women answering correctly was lower than the men’s across all six questions. Remarkably, younger workers better understood how the compounding of interest works—perhaps because student loans and other long-term debt weigh on their minds more than for older participants.
Investment Acumen vs. Investor Persona: Plan Sponsors Can Address Both
While quizzes help measure average knowledge, few participants are average investors in practice. That’s why we also included a 14-part questionnaire to help identify different types of investors and their needs. For instance, do they enjoy thinking about financial matters? Are they spenders or savers, and are they confident they’ve saved enough?
Based on their answers, participants fell into one of three investor segments: capable, eager and conservative.
Capable investors are confident and knowledgeable, generally outperforming on the financial literacy quiz. Eager participants skew younger and telegraph confidence but scored lower. Conservative investors are not only cautious but tend to be pessimistic about the prospects for their savings to last for their lifetimes.
Each participant segment can differ significantly from the other two in terms of investment knowledge and retirement-planning goals. We think plan sponsors can leverage these differences to align their plans and—most importantly—communicate in ways that will better resonate with each one. That’s the case whether it’s basic investment topics or tools that can provide reliable income.
Interestingly, all three personas stated that a steady income in retirement was the most-preferred outcome behind funding retirement—topping even protection of principal. Yet nearly five in 10 respondents believed that they could withdraw 7% or more of their assets each year without outliving their money—a gross overestimation. Meanwhile, 13% of participants wouldn’t even venture to guess (Display).
Income Solutions Should Recognize Access and Growth Needs, Too
Our survey also found that lifetime income isn’t the only key goal for participants today. They increasingly want growth potential and access to their assets, and they’d accept less income along the way to have both. Two out of three respondents were willing to take $10,000 less in guaranteed annual income if it meant that they had the flexibility to tap into their principal anytime—and that their money had the potential to grow based on market returns.
Whether it’s about financial literacy, different attitudes toward investing or varying preferences, helping an increasingly diverse body of DC plan participants invest for retirement has its challenges. But we believe that knowing what participants are thinking can give plan sponsors a big leg up, especially with the insight that many participants believe they can go it alone—but shouldn’t.
Related: Lessons From Equity Investing With a Very Long Lens on Growth