Americans Finding Financial Footing, but Still Feel Stressed

New reports indicate that retirement assets and investment options are growing, and that Americans are feeling optimistic and yet also overwhelmed about finances.

Retirement Assets Grow

Since the end of last year, total U.S. retirement assets were up 7.4%, reaching $29.1 trillion at the end of the first quarter for 2019, according to new data by the Investment Company Institute.

Retirement assets accounted for 33% of all household financial assets in the U.S. at the end of March 2019, with defined contribution (DC) plan assets reaching $8.2 trillion at the end of the first quarter — up 8.2% from year-end 2018. Of these DC plan assets, $5.7 trillion was held in 401(k) plans.

In addition to 401(k) plans, $535 billion was held in other private-sector DC plans, $1 trillion in 403(b) plans, $333 billion in 457 plans and $606 billion in the federal employees’ Thrift Savings Plan.

Mutual funds managed $3.7 trillion – or 65% – of assets held in 401(k) plans at the end of the first quarter. With $2.2 trillion, equity funds were the most common type of funds held in 401(k) plans, followed by $1 trillion in hybrid funds, which include target date funds, ICI’s data further shows.

Not surprisingly, retirement accounts held the bulk (87%) of target date mutual fund assets, with 68% held through DC plans and 19% held through IRAs.

Assets in IRAs totaled $9.4 trillion at the end of the first quarter, an increase of 8.3% from year-end 2018, while private-sector DB plans held $3.2 trillion in assets.

Plan Design and Fees

Meanwhile, a separate study by BrightScope and ICI shows that in 2016 the average large 401(k) plan offered 27 investment options, including a mix of equity funds, bond funds and TDFs. The 84-page study also found that employers often use simple matching formulas to encourage employee contributions and that plan fees continue to decline. 

Notably, the annual update to the BrightScope/ICI study finds that 401(k) plan fees continue to trend downward. BrightScope’s total plan cost measure – including all fees on the audited Form 5500 reports, as well as fees paid through investment expense ratios – was 0.96% of assets in 2016, down from 1.02% in 2009.

Not surprisingly, mutual fund expense ratios in 401(k) plans tended to be lower in larger plans and mirror the overall downward trend for plan fees, according to the study. For example, it notes that, among consistently large 401(k) plans, the average domestic equity expense ratio fell from 0.65% in 2009 to 0.45% in 2016.

Larger 401(k) plans are also more likely to automatically enroll workers into the plan. More than half of large 401(k) plans with more than $250 million in plan assets reported that they automatically enrolled their participants, and nearly 6 in 10 plans with more than $1 billion in plan assets did, compared with fewer than 20% of plans with $10 million or less in plan assets, the study shows.

Contributions and Matches

In addition, most 401(k) plans offer employer contributions. In 2016, 85% of large 401(k) plans covering more than 9 out of 10 401(k) participants had employer contributions. Nearly all of the largest plans – about 95% of 401(k) plans with 5,000 participants or more – had employer contributions. Even among smaller 401(k) plans, employer contributions are common – with nearly three-quarters of 401(k) plans in the sample with fewer than 100 participants having them in 2016.

Among the 54% of large 401(k) plans with employer contributions with simple match formulas, the most common formula was matching 50% of contributions up to 6% of employee salary, with 18.8% of large 401(k) plans using this formula.

The next most common simple match formula – used by 13.2% of large 401(k) plans with simple matches – was a 100% match of contributions up to 4% of employee salary, the report notes. Altogether, it shows that the most common match rates for employer contributions – with various limits on the maximum employee contribution matched – were 50% (used by 40.6% of large 401(k) plans with simple matches) and 100% (used by 34.2% of large 401(k) plans with simple matches).

BrightScope and ICI update their study annually, using data from the Form 5500 filed by each of the approximately 560,000 401(k) plans. The study also incorporates data from the BrightScope Defined Contribution Plan Database, which includes information from more than 50,000 large 401(k) plans that filed detailed audited reports with the Department of Labor.

Taking Americans’ Temperature

With all that good news, it isn’t that surprising that another new report reveals that Americans are feeling optimistic about their finances. But at the same time, the study also shows that they are feeling overwhelmed by their finances as they become more mindful of their spending and take steps to improve their financial lives.

Findings from the spring 2019 Merrill Edge® Report reveal that many Americans are taking positive steps that are leading to a higher level of confidence about their financial future, but the report also shows that finances are taking a toll on mental and physical health – even more so among women.

The report is a biannual study of more than 1,000 mass affluent Americans’ evolving financial concerns and priorities (for purposes of the study, mass affluent is generally defined as those with investable assets between $50,000 and $250,000). Thanks to better spending and savings habits, 85% of respondents improved their financial lives in meaningful ways in the last year:

• 45% worked at improving their credit score;
• 43% worked toward paying off some or all their credit card debt; and
• 35% established an emergency fund by setting enough aside to live on for three months without an income.

In addition, far fewer people are paying only the minimum balance on their credit card (17%), spending more than half of their paycheck on a single purchase (14%) or dipping into their retirement savings (11%).

Possibly because of these positive steps, nearly half of Gen Zers and Millennials – 44% and 48%, respectively – believe they’ll be millionaires one day. What’s more, most respondents across generations are confident in their ability to:

• retire when they want (80%);
• leave money behind for their children (80%);
• pay off student loan debt (77%); and
• even buy a second or vacation home (57%).

Mind, Body & Toll

While respondents report becoming more conscientious about money and mindful of their spending, many say that their financial life weighs heavily on their minds, affecting both their mental (59%) and physical (56%) health – and the effect is even more pronounced among today’s younger generations and women of all ages.

In addition, the study found that more than half of respondents (51%) are worried about their finances over the next five years, with top concerns including the potential for an inadequate amount of savings (55%), political instability (53%), a looming recession (47%) and market volatility (45%).

“On the bright side, Americans are prioritizing their financial goals, and taking steps towards improving their futures,” notes Aron Levine, head of Consumer Banking and Investments for Bank of America. Levine adds, however, that many find managing their money causes them a great deal of stress.

In fact, if given the choice of never having to manage their personal finances again as opposed to taking some other action, survey respondents would rather:

• Give up all social media platforms forever (41%)
• Cut carbs, sugar and/or alcohol from their life (37%)
• Lose access to their smartphone for a month (35%)
• Run into their ex every time they’re out with their current partner (25%)
• Move back in with their parents (25%)

Help Wanted

The need to tackle debt and overcome finance-related stress may be why 55% of respondents are currently turning to professional financial guidance, either in person or online, and why two-thirds plan to do so in the future, the study notes.  

A growing number are also embracing new technology and financial apps to help save and manage their money, including consumer banking apps (71%), money transfer apps (65%), personal finance apps (63%) and automated investment apps (57%).

Independent market research company Concentrix conducted the nationally representative online survey on behalf of Merrill Edge from April 17-May 9, 2019, consisting of 1,000 mass affluent respondents throughout the United States. Respondents were defined as aged 18 to 23 (Gen Z) with investable assets between $50,000 and $250,000 or those aged 18 to 23 who have investable assets between $20,000 and $50,000 with an annual income of at least $50,000; or aged 24-plus with investable assets between $50,000 and $250,000.