Advising Women to Take More Investing Risk

Use of more conservative portfolios can result in women not being adequately prepared for retirement, new research warns.

The reason why many women are more risk averse with investments than men is primarily due to income uncertainty, says Rui Yao, associate professor at the University of Missouri in Columbia, Missouri.

“The reason why men and women expect uncertain income is different,” she says. “Women are more likely to be caregivers to their parents or to raise children. Men are more likely to choose occupations with income uncertainty built in, such as becoming a car salesman. We found that income uncertainty reduced women’s willingness to take on risk—but that it increases men’s willingness to increase risk.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

More conservative portfolios can result in women not being adequately prepared for retirement, Yao says. This is particularly true for single women, who are less risk tolerant than single men or married couples, she says. Thus, Yao suggests that advisers ask their female clients if they expect to leave the workforce in order to look after their parents or raise a family. If that is the case, then, perhaps, a more conservative portfolio makes sense. However, if that is not the case, “then, advisers should say that the latest research shows that men and women don’t really differ in their need to take investment risk. Further, they should point out that women live longer and really need to take on a riskier portfolio allocation, including equities, to compensate for their longer life.”

According to 2015 data from the Census Bureau, the average life expectancy for women is 82, compared to only 78 for men, notes Robert Massa, director of retirement at Ascende in Houston. And, according to 2015 data from the Bureau of Labor Statistics, on average, women earn 79% of what men earn, he adds. “So, if women are going to make up for this disadvantage, a sound, customized investment strategy will be needed,” Massa says.

“Women as investors tend to prefer more investment education from their advisers than their male counterparts,” Massa says. “They want an adviser who tries to provide education and speaks to them with respect. Once you’ve clearly laid out the unique challenges facing women as investors, you can explain why a less conservative investment strategy is vital to their long-term success.”

If you map out the effects of saving more money combined with the higher projected investment returns that can be generated by increasing the equity position in a portfolio on a graph for women, so they can compare the potential outcomes, they will often be much more receptive to an equity-based investment strategy, Massa says.

Regardless of whether she is working with a man or a woman on the retirement portfolio, Lori Reay, a partner and retirement plan consultant at DWC in Salt Lake City, Utah, says she tries to conduct one-on-one meetings.

“I think all investment advisers are stepping up to help participants, and I don’t think it is gender-specific,” Reay says. “For anyone to be prepared for retirement, the adviser is going to be more successful if they are sitting down face-to-face for one-on-one meetings.” If the adviser takes this approach, “then, the more successful the retirement plan will be and the outcome for participants will be.”

Federal Reserve Data Offers Sweeping View of DC Plans

Workplace defined contribution plans serve as the collection mechanism for retirement savings, and IRAs serve as the resting place.

“The release of the Federal Reserve’s 2016 Survey of Consumer Finances (SCF) is a great opportunity to see how a strengthening economy, the continued maturation of the 401(k) system, and steady stock market returns have affected workers’ retirement wealth,” say researchers with the Center for Retirement Research (CRR) at Boston College.

According to CRR white paper “401(k)/IRA Holdings in 2016: An update from the SCF,” the big advantage of the survey is it provides information not only on 401(k) balances—much of which is available from financial services firms—but also on household holdings in individual retirement accounts (IRAs), which are largely rollovers from 401(k)s.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

“Essentially, 401(k)s serve as the collection mechanism for retirement saving, and IRAs serve as the resting place,” the report explains.

The good news in the updated Federal Reserve data is a slight increase in participation rates and greater use of target-date funds; the bad news is flat total contribution rates, persistently high fees and significant leakage.

“The SCF shows, for households approaching retirement, an increase in 401(k) plan balances from $111,000 in 2013 to $135,000 in 2016,” CRR researchers . “But only about half of households have 401(k)/IRA balances, and, as defined benefit [DB] plans phase out in the private sector, the rest will have no source of retirement income other than Social Security.”

The analysis concludes that 401(k) plans “could work much better and balances would be higher if all plans were fully automatic.” Particularly important are mechanisms such as automatic enrollment—for both existing and new employees—and automatic escalation in the default contribution rate. Additionally, it would be helpful if “default contribution rates were set at realistic levels,” i.e., much higher.

Crucial to note, CRR says, is that participation rates in plans without auto-enrollment actually declined between 2013 and 2016. “To the extent that plans without auto-enrollment constitute a larger share of total participants than is often reported, the decline in their participation rate would noticeably slow the pace of improvement,” the CRR concludes.

Also troubling, average employee contribution rates declined between 2015 and 2016.

“The decline can be attributed mainly to auto-enrollment, which increases participation rates but has a depressing effect on contributions,” CRR notes. “The reason is that default contribution levels are often set at 3% or lower, and [as] less than 40% of plans with auto-enrollment have auto-escalation in the default contribution, many of those who are enrolled at low contribution rates remain at those rates. Employer contributions bring the total average deferral rate to around 11%.”

The full brief, including dataset, is available for download here

«