This is a hidden column


The Benefits of Being an Engaged Retirement Investor

Active participants who think of themselves as investors do better

Jake Spiegel


Who is an individual investor? This term brings to mind a picture of a white-collar professional who actively manages his or her investments. While that’s an apt description for a certain segment of individual investors, there’s an even larger set of individual investors who don’t seem to perceive themselves as such – often to their own detriment. 

Today, defined-contribution plans are the predominant workplace-sponsored retirement plan in the U.S. And retirement investors in plans like 401(k)s are responsible for deciding how much to contribute, how to invest their contributions, and how much risk they are willing to assume. In short, to achieve a secure retirement, these workers must consider themselves to be investors.

I explored this issue in a recent paper, titled “Who Is An Investor?”, which relies on the Federal Reserve’s Survey of Consumer Finances for data. 

We found that the majority of workers who participate in tax-privileged retirement plans, such as defined-contribution plans and IRAs, do not pursue investment opportunities outside of these vehicles. We considered these workers to be “disengaged” investors. Disengaged investors comprise 76% of workers in defined-contribution plans and IRAs. They differ from those who do pursue investment opportunities outside of these vehicles in several meaningful ways. We consider those individuals to be “engaged” investors.

How do engaged retirement investors differ from disengaged retirement investors?

They have longer planning horizons. We found that disengaged investors have shorter planning horizons than engaged investors did. They were more likely to be focused on the next few months to a year when planning savings and investment decisions. Engaged investors, however, were more likely to report focusing on the next five to 10 years or longer. This difference in planning horizons even persists across age groups. Younger workers are often preoccupied with other financial obligations, such as paying off student loans or saving for a down payment on a house. But nearly twice the proportion of engaged investors between the ages of 18 and 34 reported prioritizing the next five to 10-plus years compared to similarly aged disengaged investors. 

They are willing to take on more risk. Disengaged investors further indicated that they were less interested in assuming risk than engaged investors. Nearly 80% of disengaged investors reported either not being open to take on any financial risks at all, or willing to take only average financial risks expecting to earn average returns. Meanwhile, 40% of engaged investors responded that they were willing to take on substantial risks or above-average risks. This difference, too, persists among younger workers.

They have more in retirement savings. We also found that engaged investors have more money saved in their retirement accounts than disengaged investors do. Previous research has indicated that age, income, and retirement savings are closely related. As workers age and advance in their careers, they earn more money. And as they earn more money, they are better positioned to build their savings, and their investment returns have had a longer time to compound. But even controlling for age and salary using regression analysis, we found that engaged investors had more than $160,000 more in retirement savings than disengaged investors. This result suggests that there are fundamental differences in the mindset and behavior of disengaged and engaged investors. 

The importance of changing workers’ perceptions

Through the explosive growth of defined-contribution retirement plans, many workers have exposure to the market, but may not necessarily consider themselves to be investors. Disengaged investors, with a relatively shorter planning horizon and a demonstrated preference for assuming less risk, are often not well positioned to take full advantage of the benefits of these tax-advantaged retirement vehicles. They would be well-served by considering themselves investors.

This blog post is adapted from an article that originally appeared in the February/March 2017 issue of Morningstar magazine. Read the full article.

Read the full research paper "Who Is An Investor?"

Download Now

The Morningstar Retirement Quiz for Advisors

Test your knowledge and get ideas for helping your clients.

Trending Research

Get our latest in-depth analysis and differentiated industry coverage.

Join us at the Morningstar Investment Conference

Register for MIC June 3-5