Defined Contribution Plans and the Challenge of Financial Illiteracy

Abstract

Retirement investing in the United States has changed dramatically. The classic defined benefit (DB) plan has largely been replaced by the defined contribution (DC) plan. With the latter, individual employees' decisions about how much to save for retirement and how to invest those savings determine the benefits available upon retirement. We analyze data from the 2015 National Financial Capability Study to show that people whose only exposure to investment decisions is by virtue of their participation in an employer-sponsored 401(k) plan are poorly equipped to make sound investment decisions. Specifically, they suffer from higher levels of financial illiteracy than other investors. This lack of financial literacy is critical because of both the financial consequences of poor financial decisions and a legal structure that relies on participant choice to limit the fiduciary obligations of the employer with respect to the structure and options provided by the retirement plan. In response to this concern, we propose mandated employer-provided financial education to address limited employee financial literacy. We identify and discuss three requirements that a financial education program should incorporate-a self-assessment, minimum substantive components, and timing. Formalizing the employer role in evaluating and increasing financial literacy among plan participants is a key step in providing retirement plan participants with the resources necessary to manage important decisions regarding retirement planning and, ultimately, for enhancing the financial security of American workers.

Don't Take Their Word for It: The Misclassification of Bond Mutual Funds

“…That said, individual investors appear to be tilted toward misclassifying funds to a slightly greater extent than institutions—while misclassified institutional share classes are 11.4% more likely to receive positive investor flows than other funds of their same share class, misclassified retail and retirement share classes increased their probabilities more than over 20% from their unconditional means. Among individual investors, the fact that retirement investors appear to be most influenced by misclassified funds in terms of flows is consistent with findings in Fisch, Lusardi, and Hasler (2019) that financial literacy is significantly lower for retirement investors than other types of retail investors.…”

Revisión bibliográfica sobre inclusión financiera como estrategia de recuperación y de crecimiento fintech

“…Lagoarde-Segot y Leoni (2013) y Fisch et al (2019) afirman que para minimizar las posibilidades de futuras crisis, los gobiernos y los reguladores bancarios deberían centrarse en mejorar el aprendizaje, la creación de conocimientos y la comprensión de la banca y de las finanzas en general, pues el mal generalizado que ha mantenido y ahondado las crisis está relacionado con el bajo entendimiento del sistema financiero y la poca planeación de los ciudadanos, quienes al final de cuentas son los que más sufren en las crisis.…”

“…La educación o alfabetización financiera son herramientas fundamentales para el ahorro, no solo a largo, sino también a corto plazo; como los llamados ahorros de precaución que aumentan la capacidad de una inversión frente a una crisis financiera. Quienes tienen más conocimientos financieros tienen más probabilidades de conseguir dinero si se produce una crisis inesperada y menos probabilidad de depender de préstamos (Fisch et al, 2019).…”

Retirement concerns and financial literacy in Brunei

“…Numerous studies have also touched upon the relationship between financial literacy and investments involved in retirement. In the United States, Fisch et al (2019) highlighted the need for a mandated employer-provided financial education, as they found workplace-only investors who participated in an employer-sponsored 401 (k) plan are less financially literate compared to those who made active retirement choices. They contended that not only are preretirement investments potentially affected, but a lack of financial literacy would also affect post-retirement withdrawals and investments.…”

“…More specifically, policymakers may consider providing information and knowledge on the amount needed for retirement, for instance, using various replacement ratios for individuals to better gauge the amount needed for retirement, and consequently, individuals will be in a better position to adjust their savings. Policymakers may also find value in considering a form of mandated employer-provided financial education as described in Fisch et al (2019), as there is no guarantee (similar to the US context of the 401 (k) plan), that the Bruneians' savings in the compulsory schemes (TAP and SCP) are sufficient, and that they may find value in possessing additional retirement plans, if they knew the amount that is needed for retirement.…”