Only skin-deep: Workers’ knowledge of key investing concepts

Given the woeful lack of financial planning among most U.S. working adults, it perhaps should come as no surprise that their knowledge of a key aspect of such planning — investing — is rather shallow.

For evidence of this, look no further than a new nationwide survey from Guardian Life. The research shows that plan participants, though satisfied with their 401(k)s, lack an understanding of basic investment concepts. Result: Reduced plan engagement and less successful retirement outcomes.

“Our research shows that most individuals are unprepared to make decisions or take action to optimize their 401(k) plans,” says Guardian Retirement Solutions Vice President Douglas Dubitsky. “This is where education and support can make a significant difference in improving retirement outcomes.”

The report observes “mixed results” among survey respondents when asked about their familiarity with 401(k) investment terms. Fifty percent say they have “heard of” target-date funds. More than 4 in 10 (45 percent) are acquainted with dollar-cost averaging. And 39 percent are familiar with target-risk funds.

But this general familiarity should not be confused with a firm grasp of investing concepts.

Indeed, Two-thirds of participants who have heard of target-date or target-risk funds say they do not understand either term. And 70 percent have heard of vesting but fewer than half claim they thoroughly understand the term.

“Plan participants need a better grasp of basic retirement planning terms to truly understand how 401(k)s work and how they can be engineered to meet their financial goals and optimize their contributions,” the report states. “This is particularly important as 401(k)s and other defined contribution plans are by far the largest anticipated source of retirement income for plan participants.”

The report additionally discloses that the average 401(k) participant under age 50 contributes $8,700 per year to his or her account; for those 50 or over, the average is $9,100 — a figure well below what financial service professionals deem necessary to securing a comfortable retirement.

Also, one-third of all 401(k) participants chose to leave their 401(k) accounts untouched within the past year. Translation: Few increased their contribution level.