By Jean Setzfand and Mike Watson
The topic of ageism and finances is broad, but nuanced. There are, however, two large, obvious clusters where age and money matters intersect: As people earn income, and as they save, manage, and protect their accumulated assets. Unfortunately, ageism in the workplace is common and will rise in notoriety, as the share of the workforce ages 55 and older will increase by 38 percent from 2010 to 2020 (U.S. Bureau of Labor Statistics, 2012).
Due to broad changes in the retirement benefit landscape, saving, managing, and protecting assets are difficult for any individual, including older adults. These retirement landscape changes thrust the responsibility further onto individuals. It’s a situation analogous to handing the keys of a Mack Truck to an unlicensed driver with spotty access to uneven guidance and inadequate maps, delivering precious cargo of their own hard-earned money to an unknown destination.
While this situation is no different for younger individuals, the impact on older adults often is catastrophic. As such, in this article, we use a less traditional, more subtle definition of ageism. Ageism often is defined as an active bias, in the form of prejudice or discrimination based upon a person’s age. This article explores how rampant “inaction” from government, employers, and others to protect against fraud or encourage better behaviors should be deemed ageism. This accepted passive attitude is a cause of the crippling financial situations some older individuals face.
Specifically, we examine the following three situations where passive ageism negatively impacts older people’s finances:
- Older adults often are targets of financial fraud and abuse because they own most of the investable assets (e.g., the driver of a truck full of money);
- Many investors lack financial capabilities, and require help from professionals. Unfortunately, financial professionals’ advice is systematically uneven. While many provide quality advice, others provide conflicted advice and use unsuitable sales practices (e.g., the “unlicensed” truck driver with spotty access to uneven guidance); and,
- Disclosures to help investors understand that key features in financial products, such as fees and risk, are difficult to use (e.g., the “unlicensed” truck driver with inadequate maps).
Ageism can appear in connection with almost all financial matters (credit cards, banking, etc.), but given the often catastrophic longer term nature of its impact, this article focuses mostly on long-term savings and retirement assets. While we do not downplay the severe consequences of ageism in relation to other financial matters, we see this area as being the most consequential to older adults’ long-term financial security.
We also focus on three recommended actions: Minimize the dangers of fraud and abuse; ensure financial advice is in the client’s best interest; and, improve complex disclosures. There are steps regulators can take, such as focused attention paid to older investors in both their rulemaking and follow-through enforcement. Employers need to proactively engage their employees with well-developed resources. Finally, individuals need to act to improve their financial capabilities.
Changes in the Retirement Savings Landscape
Over the past three decades, there has been a large shift in the general contract with individuals and their finances. For many people, it is more difficult to maintain adequate income in retirement than it used to be. There are two significant factors at play in the retirement savings landscape—the first is access to retirement saving plans in the workplace. Access to retirement savings vehicles in the workplace has remained relatively flat overall. In 1979, only 46 percent of people had access, and, in 2012, that has remained virtually unchanged at the same 46 percent (Employee Benefit Research Institute [EBRI], 2013).
While the access factor has not changed, it is important to note that access to savings vehicles in the workplace is a key determinant to having adequate savings for retirement. A recent study showed that 44 percent of workers who participate in a plan at work have saved at least $50,000 for retirement; but only 13 percent of people who chose not to participate, and 15 percent who were not offered a plan, had saved that much (EBRI, 2014).
The second factor is that the type of retirement plans has changed dramatically. It is well known that the numbers of employers offering their workers defined-benefit (DB) pensions have declined precipitously (and, consequently, the number of people with access to them). The percentage of the workforce with access to a traditional DB pension has dropped from 38 percent in 1980 to 18 percent in 2011 (Butrica et al., 2009; Wiatrowski, 2013).
At the same time, there has been a shift toward defined-contribution (DC) products—an investment account established and often subsidized by employers, but owned and controlled by employees—which allow people to accumulate sums of money to spend down in retirement. The percentage of workers covered by a DC plan has been increasing over time. In 2014, 40 percent of civilian workers only had access to a DC plan, which increased from 8 percent in 1980 (Butrica et al., 2009; Wiatrowski, 2013).
Studies have shown that individuals with DB plans are in a better position to obtain adequate savings to last through retirement. Having a defined-benefit accrual at age 65 can reduce the percentage of people who are “at risk” in retirement by 11.6 percent (VanDerhei, 2011).
Many policy makers hoped greater adoption of auto-features in DC plans (auto-enrollment, auto-escalation, and auto-investing/auto reallocation via Target Date Funds) after the Pension Protection Act of 2006 would address this concern. But while there has been some positive movement, the impact has not been as significant as was hoped, and has not resulted in much larger accumulations for employees, and some of the policies are limited to certain types of employees.
While a DC plan may not result in an adequate stream of income in retirement, it still provides individuals access to more assets than other financial accounts. Due to the shift in DC pensions and the ability of workers to “roll over” their accumulated contributions to an individually purchased and managed product like an IRA, this decision becomes a critical one for people’s retirement security.
In short, while the advent and broad adoption of DC plans for workers has resulted in people gaining access to a significant pool of assets, on its own, that pool of assets does not mean people are adequately prepared for retirement. Many people of all ages find it difficult to manage their assets, and the decision to turn to an advisor can be a difficult, important, and potentially expensive one.
This all adds up to an environment where many people are not as prepared for retirement as they need to be. The main takeaway is that while the general contract has shifted to individuals (leading to an unleveled playing field for many), this also has opened more people up to experience ageism. They experience it through outright fraud, scams, illegal activities, and in more subtle ways, through receiving advice and recommendations that do not fully meet their needs.
Throughout this time, Social Security benefits have become even more important—providing a secure foundation for millions of people across the income distribution. Importantly, there is less opportunity for ‘active’ ageism in the claiming process for the Social Security retirement benefits. The importance of Social Security benefits is shown by the Employee Benefit Research Institute’s (ERBI) Retirement Readiness Model. As an example, if policies don’t change and Social Security benefits are reduced in 2033 when the trust fund becomes exhausted, the EBRI’s retirement readiness rating—developed to assess national retirement income prospects—shows that Gen Xers, as a cohort, would drop in readiness from 58.9 percent to 50.9 percent (VanDerhei, 2014).
To balance the playing field, all sectors involved need to take action to eliminate ageism in retirement finances: regulators need to take a pro-investor stance with investor protection in rulemaking and follow through with enforcement; all employers need to seize their responsibilities and proactively engage employees with targeted, timely, and easy-to-understand resources; and, individuals need to increase their financial capability.
Fraud and Abuse: Minimizing the Dangers
While fraud and abuse are on the rise among people of all ages, older investors more often are fraud victims than other groups. In 2012, almost 20 percent of Americans ages 65 and older were victims of a financial scam (Investor Protection Trust, 2015). They also are at greater risk than younger people. In a report that was prepared for the Financial Industry Regulatory Authority (FINRA) Investor Education Advisory Committee, respondents were shown a series of eleven descriptions of potentially fraudulent financial opportunities and asked if they were solicited, invested, and-or lost money because of them. Older adults ages 65 and older were more likely, when compared to 40- to 49-year-olds, to have been solicited (by 15 percentage points; 78 percent to 93 percent), to have invested (by 18 percentage points; 31 percent to 49 percent), or had lost money (by 6 percentage points; 10 percent to 16 percent) (Applied Research & Consulting, 2013).
While there is a broad range of complaints concerning fraud, the top three are for identity theft, debt collection, and imposter scams, including the infamous “grandparents scam” (Federal Trade Commission, 2015).
Fraud has existed throughout time; however, changes to the retirement landscape will only exacerbate the negative trend as even more individuals enter the financial marketplace and attempt to manage their assets and investments.
Older investors (households ages 53 and older) at the end of 2013 controlled almost 75 percent of U.S. investible assets—holding $30.8 trillion of the total $41.2 trillion in assets (American Society of Pension Professionals and Actuaries, 2014). While people are living longer, the normal stages of cognitive decline become more pronounced at older ages. And the costs of fraud are significant—$2.9 billion, according to MetLife (MetLife, 2011). And, many have criticized that number as overly conservative.
There are important steps that regulators, the financial industry, and individuals can take to help prevent fraud and abuse against people of all ages.
As mentioned above, given where they are in the cycle of accumulating assets, older individuals hold more assets and are the most affected with unsuitable products, frauds, and scams. Many state attorneys general and legislatures have introduced bills to step up penalties and increase enforcement efforts to target and stop some of these efforts. (For a comprehensive listing of introduced legislation, see the National Council on State Legislatures; www.ncsl.org/.) And federal regulatory bodies like the Federal Trade Commission have made efforts to collect as much information as possible about fraud complaints and take steps to reduce future actions by providing consumers with information, tools, and resources.
Recognizing older investors as a special investor segment also is a step in the right direction. We applaud the Securities and Exchange Commission (SEC) and FINRA on their National Senior Investor Initiative, in which they conducted a coordinated series of examinations (SEC Office of Compliance Inspections, Financial Industry Regulatory Authority [FINRA], 2015). Based on their April 2015 joint report, they recommend several actions firms should take to improve protections for older investors, including those with disabilities, such as the following: Establish policies and procedures for handling investors suffering from diminished capacity, as well as an annual training for how to deal with diminished capacity; establish operational changes to levers such as automated supervisory alerts to maintain updated customer profiles that reflect personal and financial changes; and, code older investor complaints to better identify and analyze issues.
Additionally, in April 2015, FINRA launched a toll-free “FINRA Securities Helpline for Seniors” where older investors can get FINRA’s assistance or raise concerns with their brokerage accounts and investments (SEC and FINRA, 2015).
These targeted older investor efforts by the SEC and FINRA are promising. We hope to see systematic protection of the older investor segment consistently applied by financial regulators.
Beyond important actions regulators should take to improve safeguards for older investors, there are effective steps individuals can take to protect themselves from fraud. Several organizations have useful resource guides, including AARP’s Fraud Watch Network. Also, a central element to designing ways to combat fraud is to be familiar with the latest scams, and encourage people to report them.
When Financial Advice Reaps Bad Results: Finding a True Helping Hand
Financial transactions are complicated and sometimes emotionally charged. Investors often lack financial capability or personal confidence in their financial decision-making abilities, particularly if decisions have long-term future implications. It is good practice to turn to financial professionals for help and, in some cases, they are the gateway to certain products. But the financial professional landscape is hard to navigate and, because of uneven quality standards, investors may not receive the best advice.
Even if it were a static marketplace, it would be a complex one. But because the marketplace is constantly changing, it is difficult for individual investors and financial professionals to keep current (Wilson, 2012). Products are developed and sold by a range of professionals with an alphabet soup of credentials. For some investors, looking at the letters on an advisor’s business cards is akin to looking at the unplaced tiles in a Scrabble game—they don’t make any sense.
Furthermore, for older investors, financial professionals are using “senior” designations to differentiate their services. Unfortunately, the requirements to maintain a “senior” designation in some cases are not rigorous, and the misleading use of such designations has been associated with the marketing of unsuitable financial products (Wilson, 2010). Several organizations have sought to address this issue through rules and regulations. However, the Consumer Financial Protection Bureau and others have called for stronger enforcement actions. (Consumer Financial Protection Bureau, 2013).
As if navigating the sea of financial professional credentials, designations, and differentiated services were not hard enough, financial professionals are held to different standards. This is because Congress drew a distinction between broker-dealers, who were regulated as salespeople under the Securities Exchange Act of 1934, and investment advisers, who were regulated as advisers under the Investment Advisers Act of 1940. Investment advisers are held to a fiduciary standard, where the adviser has to put the client’s interests first beyond their own or their firm’s; whereas broker-dealers are held to a “suitability” standard, where advice provided only needs to be suitable for that person. However, the distinct roles that investment advisers and broker-dealers play have blurred and investors rarely understand the different legal standard to which these two types of “advisors” are held. There is an ongoing debate about this at the federal level. At the time of this writing, the U.S. Department of Labor released a proposed rule to apply the fiduciary standard to a broader class of professionals—including broker-dealers—when providing investment advice to an Employee Retirement Income Security Act−covered plan or an IRA. This is a positive move to help ensure that all investors will receive investment advice from a financial adviser who puts their best interests first.
While “suitability” standards may be sufficient in the transaction-based broker-dealer environment, there are “infractions” that seem to disproportionately affect older adults. For example, there have been surges in arbitrations related to variable annuities (Reiker, 2014).
The SEC and FINRA National Senior Investor Initiative report cites two targeted recommendations to address suitability concerns with older investors: Have policies and procedures that address suitability risks specific to older investors; and maintain product suitability guidelines for older investors who purchase complex or alternative investments.
While this is an issue that affects everyone—and we are not suggesting that older people are less competent—older adults are disproportionately harmed, due to the compounding nature of retirement savings and the limited time older investors have to recover from bad decisions.
Complex Disclosures: Developing Useful Resources and “Just-in-Time” Access
Finally, it is vital that regulators and policy makers take steps to enact a robust, yet understandable, disclosure practice for investors. Many investors are lacking important financial capabilities. And, while certain tests may show people having a certain level of financial literacy, the structure of some of those tests is not designed for people making sophisticated investment decisions in a complex marketplace. This is true for investors with fairly large assets.
At the same time, most current investment disclosures are complicated, dense documents that are not designed necessarily to increase individual investor engagement. The requirements need to be designed so they are useful for investors, rather than be viewed as merely a compliance practice. Such disclosures need to be structured and targeted with key age groupings in mind (SEC, 2012). There is a body of research studying the preferences of investors for receiving these disclosures, and research on financial literacy has shown some of the major differences and gaps by age (Lusardi, 2012). Disclosures play a more important role in informing investors, given the greater responsibility retail investors have in managing their retirement adequacy. Additionally, the usability of the disclosures should address differing investor needs.
Most people’s retirement assets are accumulated through their employer’s retirement plan. An employer’s outreach and instruction are critical tools to ensure workers have the information they need. We would like to see employers and other key stakeholders play a more active role in providing useful resources at the point of transaction. This includes the decision point when people choose an investment product and at other times throughout the process. Though the content of this information and disclosures are both incredibly important, just as crucial (if not more) are the timing and delivery method employed.
The issue of ageism and finances is multifaceted and complex. While there are sources of overt and active ageism (and we acknowledge those), we have tried to take a less traditional and more nuanced view of ageism. We’ve attempted to identify how some unconscious biases and rules that the financial system operates under contribute to systemic inaction leading to ageism against older adults.
It can be difficult to spot at first glance, and unwrapping the layers and devising solutions for it present several challenges. And, while these issues affect people of all ages, we argue that the current system has shifted to the individual so quickly that investor behavior, regulatory framework, and practices have not caught up.
Greater awareness of the issue and action from policy makers, individuals, and providers to change behaviors and modify existing rules will help. Regulators need to encourage more innovative product design, while ensuring that older investors are protected; employers need improved resources; and, individuals need to continue to take steps to improve their financial literacy.
Jean Setzfand is vice president of financial security at AARP in Washington, D.C. Mike Watson, M.P.P., is an analyst in the Office of the Chief Advocacy and Engagement Officer at AARP in Washington, D.C.
Editor’s Note: This article is taken from the Fall 2015 issue of ASA’s quarterly journal, Generations, an issue devoted to the topic “Ageism in America: Reframing the Issues and Impact.” ASA members receive Generations as a membership benefit; non-members may purchase subscriptions or single copies of issues at our online store. Full digital access to current and back issues of Generations is also available to ASA members and Generations subscribers at Ingenta Connect. For details, click here.
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