Why Young 401(k) Participants Are Losing Out on Returns

401k, returns, retirement, participants
Cash ain’t trash, but it also isn’t helping.

Are younger workers still plagued by post-financial stress disorder after witnessing the 2008 financial crisis? Could be.

The risk-averse younger generation is all about the cash, even when it comes to money they don’t intend to touch for a decade, according to a new report by Bankrate.

When surveyed about the best way to invest, 30 percent of those ages 37 and younger chose cash-centric investments like savings accounts and certificates of deposit over investments with the potential to earn much higher returns. Only 21 percent of workers 38 and older felt the same.

Meanwhile, overall, nearly a third (32 percent) of Americans think the stock market is a better choice.

When broken down by age cohort, the same holds true. A third of Gen Xers, 38 percent of Baby Boomers and 44 percent of the Silent Generation name stocks as the best investment choice.

While the youngest working generation might deem cash instruments to be “safer”—this preference may come back to bite them in the long run.

Greg McBride, CFA, and Bankrate.com’s chief financial analyst agrees.

“For investment horizons of longer than 10 years, the stock market is an entirely appropriate investment. Cash is not, and especially if you’re not seeking out the most competitive returns,” McBride said in a statement.

Perhaps everyone is feeling the effects of the housing market crash and recession to some degree, however, as cash investments were the second most preferred overall. Just under a quarter (24 percent) of respondents said they prefer these types of no-risk, long-term investments over real estate (22 percent), gold and other precious metals (9 percent), bonds (8 percent) and cryptocurrencies (2 percent).

Playing devil’s advocate, McBride pointed out the good in cash investments, explaining, “Top-yielding, nationally available bank savings accounts and money market deposit accounts can be found with very low minimum deposits, and in some cases no minimum deposit at all—making these accounts literally available to every American household.”

But consumers have to shop around to avoid stashing money in low- to no-interest offerings, thereby wasting precious time that could be spent earning interest. Younger investors, unfortunately, don’t seem to be paying much attention.

“Millennials have the lowest propensity of any generation to be earning more than 1.5 percent on their savings; they’re the most likely to be earning zero interest or to not know what rate they’re earning. Baby Boomers are the most likely to earn more than 1.5 percent,” Bankrate noted in its report.

Overall, under one in five (18 percent) adult savers is earning over 1.5 percent interest on their savings, even though better options exist. According to Bankrate, top-yielding savings and money market accounts are earning 2 percent or more, and consumers should consider opening an account with an online bank.

When asked about their reasons for not banking with an online financial institution that’s offering higher rates, respondents indicated that they’re comfortable with their current bank (36 percent), like having a local branch (31 percent), haven’t saved enough to make switching worth it (23 percent) or worry about security (22 percent). Plus, almost one in five adults didn’t even know those types of accounts exist.

John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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