Even among younger investors who work with financial advisors, knowledge about financial products and investments is low, a study by LIMRA found.
In a survey released Thursday, LIMRA found that of the mere 20% of Gen X and Gen Y investors who work with a financial professional, just 14% are “very knowledgeable” about financial products. Of investors who don’t have an advisor, just 6% say they are very knowledgeable.
“I don’t think it is a matter of Gen X and Gen Y being more or less prepared to make financial decisions,” Cecilia Shiner, senior analyst for LIMRA Retirement Research, told AdvisorOne by email. “Consumers typically become more knowledgeable and more aware of the nuances of investing and products as they age.”
Shiner added that Gen X and Y investors will likely follow similar paths as older investors as they reach key financial milestones like getting a mortgage or buying insurance when they start families. “The only difference is that they may enter certain life stages later than previous generations. Research has shown that they are likely to marry and start a family later in life than those even just 20 years ago.”
The survey found investors who contribute to their DC plans tend to be more knowledgeable than those who have a DC plan but don’t make contributions. Shiner couldn’t comment on causality, but noted that previous LIMRA research had shown that “more knowledgeable consumers are not only more likely to participate in a DC plan, but they tend to be more active with regards to retirement planning activities. We do suggest in this study that improving financial literacy may serve as a catalyst to better participation. However, other obstacles, such as convincing consumers they can afford to save, will need to be addressed.”
While the act of participating in a DC plan may help increase investors’ knowledge about investment options, Shiner noted that younger investors are more likely to be auto-enrolled in their retirement plans, thus having investment choices made for them. “Our study found that one in three Gen Y consumers had their DC plan investment mix automatically selected for them. It is unlikely that those benefiting from automatic features will become more knowledgeable just through participation.”
LIMRA studied the Federal Reserve Board’s 2010 Survey of Consumer Finances and found Gen X households have nearly $3 trillion in financial assets, 43% of which are in retirement and pension accounts. Two-thirds of those retirement assets are in defined contribution plans and 30% are in IRAs.