Retirement Savings Threats Differ by Generation

Retirement planning is the one financial issue in which all generations are most vulnerable, but for different reasons.

A research report from Financial Finesse shows how perspectives and habits of different generations impact their financial behaviors. Millennials’ lack of investment knowledge, Generation X’s debt, late Boomers’ (ages 45 to 54) focus on college savings and early Boomers’ (ages 55 to 64) lack of wealth protection are factors preventing them from being retirement ready.   

Financial Finesse found that 83% of Millennials (younger than 30) are contributing to their retirement plan at work, and 74% are saving enough to capture the full company match contribution, if available. However, only 29% have run a retirement projection and only 17% believe they are on track to replace at least 80% of their pre-retirement income in retirement. In addition, 26% contribute to a traditional or Roth IRA.

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According to the report, Millennials suffer from a relative lack of investment knowledge, with the lowest percentages that are confident that their investments are allocated properly and that have a general knowledge of stocks, bonds and mutual funds. Only 29% are confident their investments are allocated properly; 65% say they have a general knowledge about investments. In addition, only 38% have taken a risk tolerance assessment and only 25% rebalance their investments regularly.

Among Generation X (ages 30 to 44), 89% contribute to employer-sponsored retirement plan, and 74% are saving enough to capture the full company match. However, only 15% say they are on track to replace at least 80% of their income in retirement, and only 22% are contributing to a traditional or Roth IRA.

The report shows that despite their higher and increasingly dual incomes, Generation X is struggling more than other age groups with money management, retirement planning, college planning and investing. They have the lowest overall financial wellness of any generation.

(Cont’d…)

What may be holding Generation X back is not their desire to save, but their level of debt. Of employees between the ages of 30 and 44 who completed an online financial wellness assessment, 49%—the most of any generation—indicated they were uncomfortable with the amount of debt they had.

Retirement remains the largest financial vulnerability for late Baby Boomers, the research report shows. While 95% contribute to their employer-sponsored retirement plan and 80% save enough to capture the full employer match, only 18% say they are on track to replace at least 80% of pre-retirement income in retirement, and only one-quarter contribute to an IRA.

One area that this group prioritizes higher than their actual vulnerability is college funding, even though there are a plethora of available college financing options that make saving for college a lower priority than saving for retirement. After all, the report notes, there is no financial aid to apply for in retirement.   

Despite their relative financial strength, retirement is the biggest vulnerability even for those closest to retirement, the early Baby Boomers. Ninety-five percent contribute to their retirement plan at work, and 88% contribute enough to get the full company match; however, only 25% say they are on track to replace 80% of their income in retirement and only 29% contribute to an IRA.  

For Early Boomers, the greatest discrepancy between their priorities and vulnerabilities is the lack of wealth protection. Seventy-four percent do not have umbrella liability insurance and 84% do not have long-term care insurance. 

Financial Finesse studied the distinct financial issues, priorities, and vulnerabilities of Millennials, Generation X, late Baby Boomers, and early Baby Boomers, with a focus on strengths, weaknesses, opportunities, and threats each generation faces, as well as their distinct financial education and planning needs. The complete report of Financial Finesse’s Generational Research can be downloaded from http://goff.im/2012-Generational-Research.

Fee Disclosure Can Be Opportunity for Advisers

Plan sponsors are largely optimistic about fee disclosure regulations, but say they need help from advisers.

In September 2012, shortly after the first fee disclosures were delivered to plan sponsors and participants, Oppenheimer Funds conducted a nationwide survey of plan sponsors to gauge the impact of 408(b)(2) and 404(a)(5) regulations. The survey results in the paper, “Regulatory Serendipity: Fee Disclosure Generates Optimism and Opportunity,” revealed that plan sponsors are mostly positive about the disclosures. Substantially more plan sponsors believe that the benefits of fee disclosure already do or ultimately will outweigh the drawbacks (66%), compared with those who believe the drawbacks will outweigh the benefits (27%).

More than one-third said fee disclosure is a positive change, and nearly one-third said it makes their lives easier. Plan sponsors cited the top benefits as helping them meet their fiduciary responsibilities; improving provider transparency; helping them better understand fees relative to services; and making educated decisions about providers. They also think fee disclosures help participants in several ways including feeling more educated about the plan; trusting the plan sponsor; better understanding the purpose of the fees; and familiarizing themselves with the plan.

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“I think the overall results were surprisingly positive,” Kathleen Beichert, senior vice president of retirement marketing at Oppenheimer, told PLANADVISER. “This paints the picture of a much more sophisticated and aware plan sponsor than I would have anticipated.” One of the most delightful surprises, Beichert said, is that plan sponsors believe fee disclosures will prompt participants to raise their contributions because of their increased engagement in the plans. This trend of increased engagement is occurring with all plan sizes, the survey found.

Despite their optimism, the survey showed that sponsors need, and are open to, plan advisers helping them with fee disclosure. Sponsors are concerned about the time consumption of fee disclosures; the use of resources that could be better used for other purposes; and an increase in participants challenging plan decisions. “Plan sponsors were very concerned that participants would make changes to their investments [based solely on fees],” according to Beichert.

 

Only 20% of the survey respondents said they were very confident about what to do with the disclosure information received. This represents a tremendous opportunity for advisers to provide guidance and support, Oppenheimer’s paper stated. A strong majority of plan sponsors do not know how often plan providers are required to furnish information, for instance. In addition, just 9% of plan sponsors surveyed knew the three steps they must take if they do not receive adequate disclosures.

Fee disclosure has “cast a spotlight” on plans from a sponsor and participant perspective, so advisers and providers must take advantage of this opportunity to provide services that help the sponsor navigate through the disclosures by providing the appropriate tools and education, said Laura White, vice president of retirement marketing at Oppenheimer.

Plan sponsors indicated materials/collateral from advisers, investment managers and providers would help the most (29%) with understanding fee disclosure, followed by meetings/education/webinars (18%) and online education (10%).

Although sponsors are concerned that participants will make investment decisions based on fees, it seems that sponsors make provider decisions based on the same criteria. When asked to allocate 100 points to various plan provider selection criteria, sponsors allocated the most points to fees (an average of 22.2. points), almost as much as service quality and the provider’s capabilities combined. This emphasis on fees over value could lead to increased fee compression, the paper warned, so providers must articulate their value. “If you’re not able to articulate why you are not the cheapest provider, you’re really at risk of losing that relationship,” Beichert cautioned.

Fees are also the most important driver of adviser selection, although they are not identified as such a dominant criteria as they are for the plan’s recordkeeper. Many additional factors are considered almost equally important, such as investment philosophy and services. Advisers will need to demonstrate their value to substantiate their fees and, given the importance of services offered, a menu-driven approach to pricing might be optimal, the paper suggested.

Oppenheimer’s online survey was fielded in September 2012 based on responses from 200 randomly selected plan sponsors of all plan sizes across the U.S.

 

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