LUTZ BUSINESS INSIGHTS

 

PUBLISHED: AUGUST 12, 2021

AUGUST RETIREMENT PLAN NEWSLETTER

GENERATIONAL INFLUENCES AND BEHAVIORAL FINANCE

Understanding generational attitudes toward investing and the cognitive biases that can lead participants astray is key to helping employees of all ages improve their financial wellness and prepare for a secure and successful retirement.

 

Boomers

Baby Boomers may be inclined to drop cognitive anchors based on early information that cements their opinions. Unfortunately, when anchoring reference points are arbitrary or uninformed, Boomers may find themselves overconfident in financial decisions that fail to serve them over the long term. And if these decisions lead them to take on excessive risk, the results could be disastrous as they approach retirement. Financial professionals can help Boomers avoid the anchoring bias and take a more objective approach to investing by using financial wellness assessment data to direct them toward individualized financial wellness resources to improve financial decision-making.

 

Generation X

Independent and self-reliant, this cohort came into adulthood as the first generation with a world (wide web) of information at their fingertips. However, Gen Xers may allow current events or recent experiences to have an outsized influence on their financial decisions and reinforce established perceptions — this is known as the recency bias. They may, for example, be tempted to make impulsive investing decisions during or immediately following volatile markets, without fully considering whether current conditions are likely to be short-term. The recency bias can also lead some Gen X-ers to take on bigger risks in bull markets, believing that recent gains will likely persist indefinitely. In this instance, financial professionals can help such individuals step back and take a broader historical view of markets, examine economic fundamentals, reassess personal risk tolerance and review investment goals. 

 

Millennials

FOMO — or fear of missing out — can be top of mind for some millennials. And this can translate into a herding bias when it comes to their investments and the risk of jumping off a financial cliff by following the herd chasing the latest speculative investment trend. Financial professionals can help millennials fight FOMO by encouraging them to focus on investing fundamentals and creating a financial decision-making process that promotes long-term strategic thinking and prudent investing behaviors.

 

Gen Z

Gen Z values the control that knowledge and information gives them, having literally grown up knowing how to search for it online. As a result, they may be less reliant on more conventional learning settings and modalities. They came of age during a period of economic turmoil and (somewhat surprisingly) often value the stability of a traditional job over freelancing. And these young adults already recognize the importance of regular saving and investing. Time will tell whether this pragmatic and analytical tendency will turn out to be an asset for their financial decision-making over the long term. In the meantime, financial professionals can help Gen Z-ers take advantage of the benefits of investing early — and hopefully they’ll be less susceptible to retirement challenges in the future.

 

Bottom Line

Even though there are generational components to behavioral finance, every employee is unique in their beliefs, attitudes and goals. An individualized assessment platform helps financial professionals tailor solutions to all employee needs, no matter their age or level of investment experience.

 

Sources

https://www.schwabassetmanagement.com/content/why-behavioral-finance-is-important-todays-market-environment

https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/true-gen-generation-z-and-its-implications-for-companies

MEASURING FINANCIAL WELLNESS

Establishing financial wellness metrics has become increasingly important over the last year. The COVID-19 pandemic has created economic hardships for many American families, depleting emergency funds for some and forcing others to take on additional debt to cover necessary expenses. At work, the resulting stress can lead to increased absenteeism, decreased productivity and greater health care costs for plan sponsors.

Helping employees improve financial wellness is key to mitigating a number of these risks. A 2019 EBRI survey found top reasons organizations provide financial wellness programming include: enhanced satisfaction (46%), reduced financial stress (42%), increased retention (35%) and improved utilization of employer benefits (35%). But in order to tell if what they’re doing is making a meaningful impact, organizations need appropriate metrics to gauge the extent to which their financial wellness program is meeting both company and employee objectives.

 

Two Types of Financial Wellness Metrics

To assess the effectiveness of a financial wellness program, appropriate metrics tailored to program goals should be established for both individual participants and the organization as a whole.

Individual Measures

An assessment of financial wellness should not begin and end with a participant’s 401(k) contribution rate — and according to the Retirement Advisor Council, it should be done periodically. A Financial Health Assessment could look at a wide cross section of financial behaviors above and beyond retirement planning, including: emergency savings, budgeting, asset protection, estate planning and debt management. Employees are encouraged to take the assessment periodically to monitor progress.

Organizational Measures

These can include company-wide retirement plan participation rates as well as various program engagement measures such as web portal activity, webinar enrollment and registration for group and one-on-one consultations. Aggregate quantitative participant data allows plan sponsors to determine the efficacy of financial wellness programming on a broader scale. According to the Society for Human Resource Management, complementary qualitative data can also be readily obtained through informal surveys, employee focus groups and exit interviews.

 

Utilizing Financial Wellness Data

More important than merely collecting financial wellness data, however, is using it to benefit workers — and the organization. Upon completion of a financial assessment, a participant’s overall score is broken down into four components based on employee reports of their needs and goals: retirement readiness, protection planning, personal finance behaviors and investment planning.

Armed with this information, financial professionals can develop a customized action plan based on identified priorities. Resources tailored to a participant’s financial wellness assessment might include group workshops, one-on-one meetings and online educational materials. Aggregate employee data can help sponsors more effectively evaluate their program’s efficacy, utilization and ROI.

As areas of concern are identified, additional resources should continually be developed and deployed to address them.

 

Sources

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/take-steps-to-measure-and-enhance-financial-wellness-success.aspx

https://www.ebri.org/docs/default-source/fast-facts/ff-338-fwrc2019-10oct19.pdf?sfvrsn=cbe03c2f_8

https://www.plansponsor.com/measuring-success-financial-wellness-programs/

https://www.retirementadvisor.us/pdf/Research_Rpt_Employee_Engagement_R5.pdf

RETIREMENT PLAN DOCUMENTATION RETENTION: WHAT SHOULD FIDUCIARIES KEEP?

ERISA requires employers to retain certain documents. These records are critical if your plan were ever to be challenged by the IRS, DOL or plan participants.

We recommend saving the following in some type of fiduciary briefcase:

  • Agendas
  • Fiduciary Investment Reviews
  • Meeting Minutes
  • Plan Governance Documents (such as):
    • Board Resolutions
    • Charters
    • Acceptance/Resignations
  • Plan Reviews
  • Educational Materials

In addition, we recommend that you include other important documents for future retrieval such as:

  • Plan Documents
  • Amendments
  • SPDs
  • SMMs
  • Plan Policies
  • Participant Educational Materials
  • Third Party Contracts

Develop a system to make it easy for you to review, update, preserve and properly dispose of documents. If you are ever challenged, an organized system can mean the difference between a quick minimal dispute or a lengthy, drawn-out costly battle.

PARTICIPANT CORNER: SAVE EARLY, AIM FOR YOUR GOAL

Contributing to your employer’s retirement plan as soon as you’re eligible is crucial to meeting your retirement goals. The earlier you start saving, the more time compounding interest has to work on your behalf. Putting off contributions today means increased contributions to reach the same goals tomorrow.

For example:

Shane, Maria and Nadia are each beginning their retirement savings journey today and each wish to accumulate $300,000. How much do they need to contribute to meet their goal?

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

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