Could financial literacy be blocking behavioral change? That counterintuitive question is posed by financial industry research guru Warren Cormier in his latest column in NAPA Net the Magazine.
Over the past several years, the research team at Cormier’s Boston Research Technologies and the National Association of Retirement Plan Participants (NARPP) have been conducting large-scale joint research projects to better understand the barriers and factors that negatively affect savings behavior. One of their findings: People who scored higher on financial literacy tests tended to rate themselves lower on a scale of financial competence. And, conversely, people who score lower in financial literacy tests rated themselves higher on financial competency.
To gain insight into this question, Cormier sought out NARPP cofounder Laurie Rowley, a widely recognized innovator in the area of creating behavioral change in DC participants. Their Q&A makes for an interesting read:
CORMIER: Is literacy stopping behavior change? If so, what do we do about it?
ROWLEY: I think we have to move past the traditional notions of financial literacy and move to a place where we provide more tactical, instructional and intuitive informational experiences that are accessible to everyone. One’s level of financial literacy does not predict their ability to make decisions. However, we know that if we can address the cognitive and emotional barriers facing people when they are confronted with potentially huge financial decisions, we can improve the outcome.
A good example of this is the personal computer world. A personal computer is an extremely sophisticated piece of equipment, yet we don’t need to be computer literate to use our tablets, iPhones or even watches. We just need to know how to use them in a way that best meets our needs. Apple has done a very good job of making the complicated simple. Adoption of technology products is ubiquitous in part because they have made it easy for us to master these complicated tools. We are doing the same thing for retirement savings information — don’t try to make someone a financial expert, just give them the user manual; tell them what they need to know to use or operate their plan.
CORMIER: How much education is enough? Is it universal or does it vary by person?
ROWLEY: It is never enough. We should reinforce messages and help build a journey for the individual that acknowledges their needs. What is universal is that everyone has a savings journey, they just need a guide to help them figure out where they are going and how to get there.
CORMIER: What role does trust play?
ROWLEY: I like to say that trust is the dark matter of the DC industry, an unseen force that is impacts every stakeholder. For participants, their level of trust in their recordkeeper can be directly linked to their engagement with that recordkeeper and their retirement savings decisions. Trust is also linked to education; the two go hand in hand. Education can either build or erode trust. The problem is that trust in financial institutions remains at historic lows at around 12%. From the plan sponsor perspective, trustworthiness is the most important factor when selecting a record keeper. If we are going to make a real impact on engagement and financial decision-making, we have got to start working on creating experiences that build trust.
Cormier’s conclusion: As the DC industry works to change participant behavior, “let’s not throw education out as a key lever; let’s first consider new, disruptive forms of education that may be the solution.”
In addition to Cormier’s regular “Inside the Plan Participant’s Mind” column, the spring issue of NAPA Net the Magazine includes the cover story on NAPA’s top plan advisors under 40, as well as feature articles on custom TDFs and the Obama administration’s take on open MEPs. The issue also features insights from regular contributors Jerry Bramlett, Steff Chalk, Nevin Adams, David Levine, Brian Graff, Don Trone, Joseph DeNoyior, Jania Stout, Fred Barstein and Lisa Greenwald Schneider.