Risk-averse adults under the age of 30 are hoarding their cash in lieu of investing it, a troubling trend considering the high retirement burden facing the group and one that illustrates the importance of discussing auto-enrollment features for your employer clients’ 401(k) plans, as well as the use of educational tools.

About one in four Americans say the best investment option for money they don't need in the next 10 years is a savings account or a certificate of deposit, according to a national poll accompanying Bankrate's monthly Financial Security Index, which found that younger Americans, in particular, seem to favor safer investments. The survey shows adults age 18 to 29 had the highest preference for cash investments compared with all other age brackets.

The survey findings “speak to the power of having a default 401(k) investment option,” says Greg McBride, Bankrate's chief financial analyst. He tells EBA that in terms of a solution for benefit advisers to discuss with their employer clients, an auto-enrollment default is “a prudent way to get people of all ages to have an appropriate investment stance for their retirement time horizon.”

Left to their own devices, McBride adds, individuals, particularly those in the under-30 crowd, “may choose something far more conservative.”

"This is very concerning considering this age group has the biggest retirement savings burden," he says, explaining that life expectancy for this age group is getting longer, health care costs are going up, the future of Social Security is uncertain and young adults are not guaranteed the same sort of pensions their parents may have received.

Young adults are “going to require a bigger nest egg and they’re going to have to acquire more of it on their own,” says McBride. "They won't get there without being willing to assume a little short-term risk.”

Education

The Bankrate survey, however, shows “individual investors are still very risk averse," says McBride. "The wounds of [the 2008 financial crisis] remain very fresh for a lot of Americans."

For people of all ages, but especially for newer members of the workforce, he says it’s important to educate individuals about long-term investments and to put investment returns in the context of a longer period of time, such as 25 years.

Doing so, “really puts short-term volatility and even severe volatility like the financial crisis into perspective and really helps drive home the point that if you just hang in there and have the discipline to invest during those volatile periods, you end up coming out well ahead,” he says.

Educational tools can include literature distributed alongside 401(k) statements, e-mail blasts, on-site meetings or one-on-one in-person meetings with individual 401(k) participants.

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