Savers invest too little of their assets in taxable brokerage accounts and other “middle liquidity” account types, and the financial services industry is much to blame, according to a report Wednesday on consumer behavior.
The majority of U.S. households, even those that save and invest diligently, place the bulk of their investible assets in tax-deferred retirement accounts and bank accounts, which are vastly different in terms of their liquidity, the report published by Hearts & Wallets notes.
“People are sending the vast majority of their savings to one of two extremes … They’re on two ends of the spectrum,” said Laura Varas, CEO of the research and benchmarking firm. “There isn’t a lot of great advice out there about how to optimize your saving.”
Retirement plan participants who consult the advice service provided by their plan might be told to save a bigger chunk of their income in the 401(k) or perhaps start an emergency savings account. But the advice available to most consumers is lacking when it comes to taxable brokerage, health savings accounts and 529 plans, Varas noted.
“It’s crazy how few people, especially young people, realize that taxable brokerage is a great way to save money,” she said. “We found and believe that even if you only have $1,000 or $2,000 to save, it’s almost more important to optimize what types of accounts it goes into.”
That is particularly important now, as the pandemic has prompted more people to start saving or save more than they were previously, she said.
The most common change people made last year related to their household finances was to save more in bank accounts or taxable brokerage accounts, with 29% of people reporting that change. Another 20% said they increased contributions to retirement savings accounts, and 19% said they started their first emergency savings funds, according to Hearts & Wallets.
The report is based on data collected from about 6,000 U.S. households.
On average, people directed 41% of their savings last year to bank accounts or certificates of deposit and 29% to employer-sponsored retirement plans, according to Hearts & Wallets. Meanwhile, 10% of savings went to IRAs, 9% to taxable brokerage accounts, 4% to HSAs and 3% to 529 college savings accounts. The remining 4% went to other, unspecified account types, according to the report.
That allocation varied considerably by income level. Households with $48,000 or less in annual income directed an average of 59% of their savings to bank accounts or CDs, just 10% to workplace retirement plans and 21% to other vehicles such as brokerage accounts.
Those earning between $48,000 and $96,000 were much more likely to save in employer-sponsored plans, directing on average 30% of savings to such accounts and saving 44% in bank accounts, according to Hearts & Wallets. Those with income above $160,000 per year saved 25% in bank accounts, 38% in employer plans, 16% in taxable brokerage accounts, 4% in HSAs, 11% in IRAs and 4% in 529s.
Of course, people with higher incomes are able to save a higher portion of their income in general — 59% of those whose income exceeds $160,000 save 10% or more, while that was the case for just 23% of people with household income between $48,000 and $96,000, according to the report.
Further, there was a correlation between working with a paid investment professional and investing in those “middle liquidity” accounts, the report found. People who paid for financial advice invested an average of 17% of savings in taxable brokerage accounts, compared with 12% among those who used no financial advice.
“Advisers have a really exciting role” in shaping investment behavior, Varas said.
“We hope that more savings will go across the spectrum, because it’s something that is actually associated with successful outcomes,” she said. “You don’t want to have all your money in one type of account.”
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As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.