A new report written by David Blanchett seeks to determine the financially literacy of so-called 401(k) millionaires, or people who have amassed a seven-figure balance within their retirement account.
Under federal regulations, “accredited investors” are assumed to be financially sophisticated individuals and are therefore able to participate in more complex investment strategies. In recent years, various stakeholders have been calling on federal regulators to make it easier for 401(k) investors to make such investments — something that current regulations restrict.
But the latest SEC review of the accredited investor definition questions whether qualified retirement assets, which would include IRAs and 401(k)s, should be excluded from net worth when determining accredited investor status.
The SEC’s assumption, experts say, is that retirement plan participants may have little, if any, prior investing experience and may not get adequate guidance from professional advisors as they consider alternative asset classes beyond traditional stocks and bonds.
The analysis, put together in collaboration with Drew Carrington and published by the Defined Contribution Institutional Investment Association, finds a correlation between greater 401(k) account assets and higher financial literacy. As such, the researchers argue, it would make little sense to bar 401(k) millionaires from investor accreditation.
Financial Literacy and the 'Millionaire' Investor
In running their analysis, Carrington, of iCapital, and Blanchett, of PGIM, leverage data from the Federal Reserve’s 2022 Survey of Consumer Finances to explore how financial literacy varies among different types of investors.
Specifically, they look at three questions included in the survey that gauge financial literacy by asking about the risk of company stock, compound growth and inflation. Known as the “Big Three,” these questions are considered useful by researchers when assessing how people understand basic financial concepts, according to Blanchett and Carrington.
For the analysis, they separated households that meet the accredited investor definition into those who have $1 million or more in qualified savings, who they call “401(k) millionaires,” and all other accredited investor households.
“We see that average financial literacy scores are higher among 401(k) millionaires,” Blanchett and Carrington observe. “Additionally, 401(k) millionaires have higher levels of self-assessed knowledge on personal financial matters and tend to have more years of education compared to other accredited investors, both of which would generally be assumed to be positively related to financial sophistication.”
The Bottom Line
Blanchett and Carrington say their results run contrary to suggestions that qualified retirement savings should be excluded from estimates of financial sophistication.
“We find evidence that households with significant qualified retirement savings are more financially literate,” they write. “One potential explanation for this effect is that it takes decades of good decision making to accumulate a sufficient level of savings to be a ‘401(k) millionaire,’ even for the relatively unengaged.”
Therefore, they conclude, suggestions that excluding qualified assets from net worth under the accredited investor definition seem counter to the financial sophistication levels of those investors who accumulate significant levels of qualified savings.
Pictured: David Blanchett
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