Investor financial literacy in the workplace

  • The dramatic shift from traditional pension plans to participant-directed 401(k) plans has increased the decision-making responsibility of individual investors for their own retirement planning. With this shift comes increasing evidence that investors are making poor decisions in choosing how much to save for retirement and in selecting among their investment options. Studies question the value of efforts to improve these decisions through regulatory reforms or investor education. This article posits that deficiencies in workplace retirement savings cannot be adequately addressed until the reasons for poor investment decisions are better understood. We report the results of an exploratory study that asked subjects to complete a simulated retirement investment task and collected information about their financial knowledge and preferences. The study enabled us to measure financial literacy and evaluate its relationship to retirement investment decision-making. In line with existing research, we found a strong relationship between financial literacy and successful retirement investing. Our results suggest, however, that the relevant understanding in this context is not about math so much as it is a basic knowledge of the relative costs and benefits of the major investment categories. Finally, we present results suggesting that financial literacy is separate from investment preferences — specifically, that tolerance for risk is a separate and highly predictive variable in estimating retirement planning success. Our research suggests that individual employees are likely to lack the skills necessary to support the current regulatory model of participant-directed retirement investing. The structure and regulation of retirement plans ought to take this fact seriously. We explore the potential for investor education and professional advice, respectively, to overcome the limitations of individualized choice.

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Metadaten
Author:Jill E. Fisch, Tess Wilkinson-Ryan, Kristin Firth
URN:urn:nbn:de:hebis:30:3-420723
URL:https://ssrn.com/abstract=2865884
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 554
Series (Serial Number):CFS working paper series (554)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Date of Publication (online):2016/11/15
Year of first Publication:2016
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2016/11/15
Issue:Draft – September 12, 2015
Page Number:43
HeBIS-PPN:396765459
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht