New research from Spectrem Group highlights a perplexing fact
about financial altruism: Those with less saved are likelier to want to use their
wealth to help others.
More than one-third of Gen X investors say they want to use
their wealth to help others, according to a new Spectrem Group Study, “Financial Behaviors and the Participant’s
Mindset.”
Yet, the same study indicates that as age and household
wealth increases, “attitudes tend to shift more towards growing and preserving
wealth rather than using it to help others.” According to the report, slightly
more than a quarter of households surveyed with investments of between $10,000
and $99,000 say they are interested in using their wealth to help others. But
among respondents with more than $100,000 saved, just over one in five (22%) suggested
that “using their money to help others is important to them.”
According to Spectrem Group, this effect extends beyond
wanting to use wealth to help other individuals. The study shows that more
affluent investors are also somewhat less interested in socially
responsible investments, for example, although interest in this type of
investing remains fairly low across the board.
Slightly more than half (54%) of investors with plan
balances of less than $10,000 are concerned with the social responsibility of
their investments, the report explains, while investors with plan balances of
between $10,000 and $49,000 are right behind them, at 53%. Among investors with
a plan balance of $50,000 to $99,000, less than half (46%) are concerned with
the social responsibility of their investments. “The largest decrease between wealth segments occurs among
individuals with a plan balance of more than $100,000,” Spectrem Group finds, “with
only 36% interested in making socially responsible investments.”
The report goes on to highlight the “significant gender gap with
regard to interest in socially responsible investing.” According to Spectrem Group,
women in general are far more interested in socially responsible investing than
men in general, with 56% saying they are interested, versus just one in three
men saying the same.
It’s not just a U.S. phenomenon: longer lives and
the rise of defined contribution plans are creating a global need for deeper knowledge about personal savings and investing.
“Employees around the world are bearing the risk and
responsibility of managing their retirement, and we must do more to help ensure
they aren’t going to outlive their money,” says Jim McCaughan, CEO of Principal
Global Investors.
The call to action comes with the release of a new white
paper published by CREATE-Research and Principal Financial Group, “Financial
Literacy: Smoothing the path to improved retirement savings.” As the title
implies, the paper steps out how longer life expectancies, coupled with rapid
adoption of defined contribution (DC) retirement plans, are driving the need for
more basic investment education worldwide.
“Plan features such as auto-enrollment and default
investment options have been an important first
step to increasing participation, but they should be supplemented with
education around the basic rules of investing,” McCaughan says.
According to the paper, it is
essential for the long-term success of the DC system, both in the U.S. and
globally, for plan sponsors to practice ”nudge economics,” subtly but consistently
pushing employees into participating in carefully designed savings plans. While sponsors have
increasingly adopted auto-enrollment and auto-escalation, researchers point to
a need for more auto-education.
“These innovations need to be complemented by higher
financial literacy to counter two investor traits that conspire against better
retirement outcomes, which are short-termism, the focus on short-term results
over long-term investing, and herding, the tendency for investors to gravitate
to similar investments based on how others are investing,” the paper explains. “There
are implications of inaction for all future retirees, but especially
Millennials, who are expected to spend as many years in retirement as they do
in the workforce if the retirement age doesn’t rise along with life expectancy.”
NEXT: Active education
needed
According to Principal and
CREATE, asset managers and advisers should play a more active role in educating savers on
the investment basics, including the “importance of the
savings rate, understanding what investing is all about, why things can go
wrong, and how to minimize downsides and turn them into opportunities.”
These were traditionally
issues tackled handily (and behind the scenes) on behalf of plan participants by skilled defined benefit plan sponsors, but such matters now have
to be confronted directly by untrained individuals—especially in cases where
the plan sponsor is unwilling to take a paternalistic approach to the
retirement benefit.
“New government education
initiatives are helping to close the knowledge gap, but a holistic approach is
needed that includes plan sponsors, participants, financial advisers and asset
managers,” warns Amin Rajan, CEO of CREATE-Research and author of the report.
“Participants need objective, jargon-free, emotionally inspired education that
shows how knowledge of investment basics can benefit their retirement nest egg.”
High-quality education of this
type may not be easy/affordable to deliver from the perspective of both
providers and consumers of retirement plan services, but it is increasingly
essential for the smooth functioning of the DC system, the paper argues.
“Even Millennials with advanced education and high income
levels tend to have low levels of financial literacy,” Rajan adds.
“Fortunately, you do not have to become an expert to make progress in your
retirement savings. Good plan design, coupled with a baseline understanding of
the costs and benefits of major asset classes, will go a long way.”
NEXT: What exactly is
quality education?
“While the auto-features of the 2006 Pension Protection Act
helped to bring more American employees into the system and prevent them from
making suboptimal asset choices, more must be done to help instill good savings
habits in this age of rampant consumerism and easy credit,” the paper warns. “The
DC system in the U.S. has succeeded in putting millions of Americans on track
for retirement. But more can be done.”
The paper points to evidence “showing that the bias towards
immediate gratification is a big factor in determining the size of the
retirement pot.” Another major factor to be considered by any education program:
“Making key retirement decisions is not as straightforward as buying a house; rather
they are often driven by changes in family, health, job and market
circumstances.”
According to Principal, at an operational level, “financial
literacy aims to enhance an individual’s ability, willingness and
self-discipline to carry out budgeting and saving.” This discipline should be
strong enough and practically minded enough to help the individual think beyond day-to-day
financial needs and start actually believing in the need to save for retirement—or an unexpected rainy day.
Borrowing and credit card usage are also particularly important
to address, according to the paper, with both workers and retirees needing to “ensure
consumerism does not triumph over thrift.”
While the auto-features of the PPA are still reshaping the
U.S. DC market, “one thing is clear,” the paper concludes. “The current level
of financial literacy remains disturbingly low. Investors globally scored
barely a ‘D’ grade in our financial literacy test. Nearly half of them didn’t
know the annual return on their investments. Sixty-four percent didn’t know the
fees they were charged.”
The full white paper is available here. Additional information on CREATE-Research can be
found at www.create-research.co.uk.