Advisers Can Provide Needed Financial Education

A study released by The Guardian Insurance & Annuity Company Inc. reveals a lack of understanding of basic investment terms likely contributes to lower plan engagement and less successful retirement outcomes. A majority of participants who have heard of financial terms like target-date funds (TDFs) and vesting do not understand the terms completely, and more than three-quarters (77%) do not have a formal financial plan. 

Douglas Dubitsky, vice president of Guardian Retirement Solutions, believes it is reasonable to speculate on the link between comprehension, clarity and participant engagement, adding that the research shows “most individuals are unprepared to make decisions or take action to optimize their 401(k) plans.” He explains, “This is where education and support can make a significant difference in improving retirement outcomes.”

While financial experts recommend 70% to 80% income replacement, the survey found participants expect 95%. However, they maintain these expectations without basic retirement investment knowledge. In relation to their 401(k), 50% of participants have heard of target-date funds, 45% knew of dollar-cost averaging and 39% were familiar with target-risk funds. However, of those who have heard of target-date or target-risk funds, two-thirds admit they do not understand the terms.

The “Small Plan 401(k) RetireWell Study 2.0: What’s Working and Not Working for Small Plan Participants” reveals 401(k) plans are underutilized, with the median participant deferral rate at 9% of personal income, well below the recommended number to build a secure retirement income. Additionally, one-third of participants chose to leave their 401(k) accounts untouched in the past year, meaning few increased their contributions. A financial professional could provide these participants with guidance and information about how current contribution rates compare with future income replacement, to compel participants to set more money aside.

Despite participants’ lack of financial education, 92% reported being very or somewhat satisfied with their 401(k) plan. Participants who worked with a financial professional were more satisfied on several fronts, including with features and investments available in their 401(k) plan, with information received about their plan and with their 401(k) plan overall.

“The simple conclusion is that the more participants know, the more they will save,” says Dubitsky.

Additional information regarding the nationally representative study, which was conducted by Brightwork Partners LLC in November 2014 among 2,000 active 401(k) participants using a quantitative 25-minute online survey, is available here.