Over the past few decades, employer-sponsored 401(k)s have mostly replaced workplace pension plans, except within the public sector. In 2023, just 15% of private sector employees were offered a pension plan, compared to the 67% with access to an employer 401(k) account.
In addition to lacking the guaranteed income component of pensions, 401(k)s can be confusing and difficult to navigate, especially for workers less familiar with managing investments.
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Workers with a pension plan are guaranteed income throughout their entire retirement, and it is up to the employer to manage investment funds accordingly.
The rise in popularity of 401(k)s has shifted the risk of managing finances to workers — during both the accumulation and spending phases.
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This paradigm shift has also created a substantial retirement knowledge gap for workers who must now take on a more active role in managing their financial plans. 53% of Americans note that they don’t understand how Social Security will fit into their retirement plan, and 43% admit they’re not clear on what a 401(k) even is.
Pontera recently released its 401(k) Literacy Study, and the results underscore the widening retirement knowledge gap between those with advisors and those without. Professional financial guidance may give cautious investors more confidence in their investment portfolios.
Workers lack confidence when managing retirement investments
Most Americans (81%) prefer 401(k)s over IRAs when choosing a retirement plan, with respondents highlighting employer contribution match and higher contribution limits as the top benefits. However, half of all 401(k) participants need clarification on their plan options.
Managing risk, understanding tax implications, and determining the correct asset allocations are among the top concerns for savers. 38% are unsure of their financial risk appetite and don’t know how to choose the right mix of assets to match their preferences.
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While employers typically provide online tools and resources to help employees better understand their retirement accounts, managing a long-term investment portfolio without experience or formal training can be tricky. Most workers agree: 60% say they’re uncertain when making 401(k) investment decisions.
84% of those with a financial advisor overseeing their 401(k) note that professional guidance gives them confidence in their retirement plan and peace of mind.
Financial advisors are most helpful in helping consumers understand their risk preferences and time horizons and keeping them on track to meet goals within that time frame.
Utilizing a financial advisor can unlock financial success
Hiring a financial advisor simplifies the financial planning process and can materially improve investment performance. Fidelity notes that financial advice can increase portfolio returns by over 5%, depending on the timeline.
Professional guidance can also help alleviate growing concerns about a looming retirement crisis, as many consumers overestimate their financial literacy. While 60% of Americans consider themselves very financially literate, 74% did not know when they would be eligible for 401(k) catch-up contributions.
Related: The average American faces one major 401(k) retirement dilemma
The confidence from having a financial advisor pays off in dividends, as it empowers consumers to become more involved in their financial plans. More than half of workers with an advisor check their 401(k) balance and contribution rate at least once a week, versus just 34% of unadvised participants.
Advised workers contribute 15% of their income to their workplace retirement accounts, as opposed to the 10% that those without an advisor contribute.
These trends add to the growing retirement savings gap, often to the detriment of lower-income workers, women, and minorities.
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