Plan Participants Puzzle Over Investing

The three types of investor persona can help retirement plans boost the knowledge and confidence of their workforce.

Investing in general and target-date funds (TDFs) in particular continue to confound retirement plan participants, according to new research by AB (formerly AllianceBernstein).

Participant understanding of TDFs is elastic, depending on various AB studies, and can range from high to low, or sometimes come in for praise. Plan advisers and plan sponsors may find that getting to the roots of a participant’s investor style is the answer to providing appropriate education on investments.

In the newest study, AB contends its findings reflect the broader lack of financial literacy among U.S. workers, but also revealed that a new categorization of investor personas can help plan sponsors improve participants’ knowledge and confidence, and lead them to greater retirement readiness.

As retirement confidence among workers remains chronically low and few participants see a comfortable retirement as a reality, targeted investor education and communications are more critical than ever. Grouping participants based on common financial attitudes and distinct investor personas—capable, eager or conservative—lets sponsors accurately address their employees’ investing needs, strengths and weaknesses, and help them reach better retirement savings outcomes.

Tailoring outreach to plan participants shows the trend is reversible, according to Richard Davies, senior managing director and global head of defined contribution at AB. “Targeted engagement methods may make it possible to increase the knowledge of participants who lack financial literacy, and the confidence of those who are overly conservative,” Davies says.

Misperceptions around TDFs have also risen, with target-date users being less knowledgeable about their TDFs than participants in AB’s 2014 survey, as well as in comparison to target-date non-users. An overwhelming 87% of participants, however, reacted favorably when asked how they would feel if their employer automatically invested their contributions into a TDF. And if it were a target-date solution with a guaranteed income stream for life, the response was even more favorable. Nearly 90% of all employees indicated they would keep some or all of their contributions in a guaranteed-income TDF if plan sponsors automatically enrolled them into one of these funds. 

NEXT: Financial illiteracy partners with lower plan engagement

In many cases, survey results show that more financial literacy goes hand in hand with higher engagement, higher contribution rates and higher confidence. Lower financial literacy can turn the freedom of choice—a cornerstone of DC plans—into the freedom to fail.

Retirement confidence is quite low, according to the survey, with 42% of workers blaming not saving enough as the key reason. Workers’ top concerns also remain the same as in previous years: they don’t think they’ll have enough money to live on as they do now.

Few workers see a comfortable retirement as a reality. A quarter plan to delay retirement, while 32% say they will continue to work part-time. Curiously, a quarter say they’ll get a pension, even though more companies are terminating or freezing their defined benefit plans.

Many respondents fared poorly when asked eight simple investing questions: Only 12% got all eight questions right. One-third answered three to five questions correctly, while one-fourth remain in the dark with two or fewer correct answers.

Financial literacy is more than just academic: On average, participants who feel knowledgeable and are comfortable making their own investment decisions contribute at a rate two full percentage points higher (8%) than that of less confident investors (6%).

Designating investors as active or accidental is no longer enough, AB says. In the current survey, participants were grouped into categories based on common financial attitudes and interests.

Capable, confident investors feel knowledgeable about investing and do well on financial literacy tests, but may not fully understand the potential pain of taking too much risk. Sponsors can improve their engagement by delivering targeted articles on specific investing risk/reward hazards.

Eager, young, unaware participants have high enthusiasm and confidence but score low on investing questions. Sponsors should demonstrate the long-term, cumulative difference that results from higher contributions early on to show the growth advantages of long-term investing, and also make the most of social media.

Conservative, cautious savers have low confidence and low investing acumen, but are diligent savers and know more than they realize. Sponsors should show them time is on their side and demonstrate the damaging risk of a savings shortfall from an overly safe approach to increase their willingness to invest.

“America’s retirement readiness is nowhere near what it needs to be. It is even more troubling that we are seeing a decline in workers’ retirement savings knowledge from previous years,” Davies says. “It is not surprising that in this environment of declining confidence and misunderstandings, participants would benefit from features like auto-enrollment and auto-escalation into TDFs as a means to getting them started and saving more for their retirement.”

AB conducted its 11th plan participant survey online in May and June. Survey respondents were 1,009 employees eligible for their companies’ retirement plans, at least 18 years old and worked for firms that offered DC plans.