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Young Investors Need More Financial Education

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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.

Gen X might not be saving enough, though. LIMRA found the median deferral rate among Gen X investors to be 6%, but with the youngest members of that generation in their 30s, they should be saving at least 10%. Less than half of Gen X respondents are saving more than 8%, LIMRA found.

“At this point, only one in five Gen X consumers are working with an advisor and the financial advice needs of those households are likely focused on basic investments, life insurance, tax advice and other kinds of insurance rather than retirement planning,” Shiner said. “However, reviewing the current saving levels, investments, and strategies of Gen X households could help put them on the path to a more secure retirement.”

Being younger, Gen Y naturally had fewer assets: just $229 billion, according to LIMRA. However, while they’re saving as much as Gen X, (the median deferral rate for Gen Y is also 6%), 20% are saving less than 3%.

Shiner said there’s no ideal savings rate for Gen Y consumers, but suggested industry experts’ recommendation of saving enough to replace 70% to 80% of working income. A workable savings rate is based on several factors, she added, like the amount investors have already saved, income levels, whether their spouse or partner is saving, defined benefit pension plan coverage, job stability and other factors. “As a result of Gen Y’s more limited income levels and high debt levels, it will be difficult to convince Gen Y workers to save or save more. However, programs such as automatic deferral limit increases could make saving increases more palatable by tying those increases to wage or pay raises.”

As boomers move into retirement and advisors turn their attention to planning with younger investors, Shiner doesn’t expect them to be “radically different” from older investors. “However, they will likely be more comfortable executing service actions on their own and only turning to advisors for their expertise instead of every step associated with purchasing a financial product,” she said. As a consequence of widely available financial information from non-professional sources like the Internet, advisors may find they don’t need to provide basic information as frequently as they may have with their older clients.


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