Two recent surveys, one from TIAA-CREF the other from LIMRA, found that fewer than one in five respondents contributed to an individual retirement account. The reason: People don't understand them.
The TIAA-CREF survey of 1,013 adults found that just 18 percent said they are currently contributing to an IRA. Another 14 percent said they have an IRA, but they are not contributing anything to it.
Respondents cited a lack of understanding about the long-term benefits of IRAs as the reason. Thirty-nine percent of respondents who are not contributing to an IRA and would not consider one as part of their retirement strategy said not knowing enough about the vehicles was the reason.
The LIMRA survey found similar results. Just 17 percent of the 995 respondents said they are currently contributing to a traditional IRA, and one-third of those that do not contribute to an IRA cited a lack of understanding about them.
“Our research indicates that there is a significant market opportunity for financial advisors and companies who help these consumers better understand and invest in an IRA,” said Cecilia Shiner, an assistant research director at LIMRA, a retirement research and education organization.
According to the LIMRA study, 40 percent of workers would be more likely to contribute to an IRA if a payroll deduction option were available through their employer.
“Offering an auto-IRA through the workplace could encourage workers to systematically save and improve their financial security in retirement,” said Shiner.
According to TIAA-CREF, different age groups show different levels of knowledge about IRAs. Fewer than half of the respondents to its survey (46 percent) of those age 18 to 34 were able to correctly identify an IRA, while 57 percent of the entire group could. Those age 18 to 34 were also the least likely to be contributing to an IRA.
As income and education levels rose, so did contributions to IRAs, TIAA-CREF found. College graduates were far more likely to be contributing to an IRA; 28 percent of them did, while only 18 percent of the entire group did. Sixteen percent of those with some college education were contributing to an IRA, while only 12 percent of those with a high school education or less were contributing.
“A knowledge gap, especially at lower income and education levels, persists around IRAs and their role in constructing a comprehensive retirement strategy,” said Doug Chittenden, executive vice president, individual business for TIAA-CREF. “Contributing the maximum amount to an IRA brings the greatest benefit, but even opening an IRA and adding just a small amount each month is a great start that offers the advantages of compounded investment growth and tax savings over time.”