Data & Research April 28, 2016

Most Americans Think Financial Products Are Free

And of those who think they pay for these products, many have no idea how much.
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Most Americans believe they pay nothing for their financial products or have no idea what they pay, according to a study by Hearts & Wallets, “Wants & Pricing: What Investors Buy & Competitive Ratings.”

About one-third (31%) say don’t know what they pay for their financial products, an increase of four percentage point in one year. Less than one-third (28%) say for certain they are charged a fee by a retail financial “store,” which Hearts & Wallets defines as retail and defined contribution providers that work directly with investors. Of the 41% who say they pay their financial store “nothing” and instead pay through actual products, 72% say they pay nothing for the product.

“Everyone knows nothing is free in life,” says Laura Varas, founder and CEO of Hearts & Wallets. “When you add together the Americans who say they don’t know what they pay for their financial products, and the high number of people who say they pay nothing for products that they obtain through their retail financial stores, we have a major problem. Consumers should know what they pay.”

Varas adds that the industry has a responsibility to price clearly and should lay out the different choices available to consumers. Understanding how a firm earns money is the No. 1 trust driver within the control of a financial services firm, Hearts & Wallets says. Only one in five consumers has a clear understanding of the incentives of their providers, a figure that has not improved year to year. “Competition will force traditional financial services firms to confront the pricing issue,” Varas says. “Robo-advisers and other new fintech entrants are explaining pricing clearly and pushing others in the marketplace to do the same.”

NEXT: What investors want The study also ranked U.S. households’ top 10 “wants” in their financial services providers and found that all income groups and life stages are becoming more demanding. The top three most important attributes are “fees clear and understandable” (56%), “is unbiased, puts my interests first” (54%) and “explains things in understandable terms” (54%). About half of investors are highly price-sensitive and want providers to have “low fees” (54%) or at least “fees that are reasonable for the service provided” (53%).

“To differentiate services, providers should determine which distinct market segments they want to address,” Varas says. “For example, people close to retirement are more anxious, so the reliability service dimension of ‘is unbiased, puts my interests first’ is much higher than for a Millennial.”

The Markets April 28, 2016

Recently Hired 401(k) Plan Participants Likely Choose TDFs

59% of recently hired 401(k) participants held TDFs, compared with 48% of 401(k) plan participants overall, a study found.
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Interest in target-date and other types of balanced funds remained strong through 2014, with younger plan participants more likely to hold target-date funds (TDFs) than older participants, according to a new joint study released by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

In 2014, 60% of 401(k) participants in their 20s held TDFs, compared with 41% of 401(k) participants in their 60s.

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The study, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2014,” also found that recently hired participants (two or fewer years of tenure) most likely use TDFs—59% of recently hired 401(k) participants held TDFs, compared with 48% of 401(k) plan participants overall.

“Target-date funds are a popular, convenient investment choice for savers looking for professional asset allocation, portfolio diversification, and automatic rebalancing over time,” says Sarah Holden, ICI senior director of retirement and investor research. “More than 70% of 401(k) plans included target-date funds in their investment lineup in 2014, and recently hired workers, in particular, often invest in these diversified funds.”

Among participants who were offered TDFs, 65% opted to use them.

NEXT: Most 401(k) assets in equities

The study found about two-thirds of 401(k) assets continue to be invested in stocks through equity funds, the equity portion of balanced funds, and company stock in 2014. However, 401(k) participants’ investment in company stock continued at historically low levels. Only 7% of 401(k) assets were invested in company stock in 2014. This share has fallen by 63% since 1999, when company stock accounted for 19% of assets.

An additional 27% of 401(k) assets were in fixed-income securities such as stable value investments, bond funds, and money funds.

“The bulk of 401(k) assets continued to be invested in equities at year-end 2014,” says Jack VanDerhei, EBRI research director. “This is driven in part by younger plan participants, who have higher concentrations in equities. Participants in their sixties remain focused on growth as well, however, allocating 56% of 401(k) plan assets to equity investments.”

In 2014, 8% of 401(k) plan participants in their 20s had no equities, while three-quarters of them had more than 80% of their account balances invested in equities. In comparison, 12% of 401(k) plan participants in their 60s had no equities, while only 22% of them had more than 80% of their account balances invested in equities.

Other findings of the study include:

  • 401(k) participants were slightly less likely to have loans outstanding at year-end 2014 compared with year-end 2013. At the end of 2014, 20% of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) accounts, down from 21% at the end of 2013.
  • The average 401(k) account balance tends to increase with participant age and tenure. For example, in 2014, participants in their thirties with more than two years and up to five years of tenure had an average 401(k) balance of close to $25,000, while participants in their sixties with more than 30 years of tenure had an average 401(k) account balance of nearly $275,000.

The study is based on the EBRI/ICI database of employer-sponsored 401(k) plans, which includes statistical information about 24.9 million 401(k) plan participants in 81,139 plans, which hold $1.9 trillion in assets and cover 45% of the universe of 401(k) participants.

Full results of the annual EBRI/ICI 401(k) database update are posted on each organization’s website, at www.ebri.org and www.ici.org.

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