Skip to main content

You are here

Advertisement

Financial Literacy Seen as Lagging Among Workplace-only Investors

Investment Management

Many U.S. investors whose exposure to investment decisions comes solely through participation in a workplace retirement plan were found to be less well equipped to manage their investments than people who invest outside a plan, according to a new study.

Analyzing data from the FINRA Foundation’s 2018 National Financial Capability Study, a research project comprised of nearly 15,000 Americans aged 25 to 65, “New Evidence on the Financial Knowledge and Characteristics of Investors” finds that knowledge of basic financial concepts was “alarmingly low” across investor groups, but workplace-only investors knew much less than investors with self-directed retirement savings accounts or other financial investments separate from any employer-provided plans.

“We find that workplace-only investors, who are exposed to investment decisions solely through participation in an employer-sponsored retirement plan, are different from more active investors and are largely unprepared to make sound saving and investment decisions,” according to the research by the FINRA Foundation and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business. 

Investors were categorized into two segments: workplace-only investors who only had retirement accounts through their employer and “active investors” who had private retirement accounts or other investments in addition to possibly having an employer account. The research found that active investors are more likely to have higher levels of financial literacy and are better equipped to make financial decisions.  

Overall, investors had significant difficulty answering questions connected to two areas of investment decision-making: asset pricing and risk diversification. Only 25% of workplace-only investors could correctly answer the asset pricing question about their understanding of the relationship between interest rates and bond prices, while 35% of active investors correctly answered that question. The same pattern held for risk diversification, which was correctly answered by 60% of active investors but just 46% of workplace-only investors.

Auto-enrollment Impact?

Interestingly, the study observes that while employer-sponsored retirement plans may have the benefit of serving as an on-ramp to investing in taxable investment accounts, the low financial knowledge levels among workplace-only investors might reflect the impact of the rise in automatic enrollment, particularly among large companies. 

While the study does not measure the extent to which workplace-only investors were auto-enrolled, it observes that workplace retirement savings plans which feature automatic enrollment “typically require participants to make few or no active choices” about their retirement account investments. “These findings are simple, univariate statistics and correlations, but they show a striking difference in financial knowledge across investors and overall low levels of financial literacy,” the authors found.  

Gender Gap 

One striking finding, according to the researchers, is the significant gender gap that exists among investors – women comprised 53% of the workplace-only investor group and 38% of active investors. In addition, workplace-only investors also were more likely to include individuals who were divorced or separated, had lower incomes and less education, and were less likely to be self-employed. 

An additional reason why financial literacy varies so much among the subgroups may be access to and participation in financial education programs. Among workplace-only investors, the study found that only 28% were offered financial education in an educational institution or a workplace. Among active investors, however, this percentage was 42%. 

Workplace Wellness

Given the ongoing shift from DB plans to DC plans, the researchers cite an increasing need for financial education. “Many investors, and especially those who are exposed to investment decisions solely through participation in an employer-sponsored retirement plan, lack financial literacy,” says GFLEC Academic Director of Annamaria Lusardi. “This is a problem that cannot be overlooked. Our findings signal a great need for targeted financial education programs that raise financial knowledge, particularly in the workplace.” 

Accordingly, the researchers suggest that an effective financial education program should take into account the employees’ financial situation and follow an integrated approach that considers both assets and debt rather than focusing only on retirement savings. Moreover, they note that, given the heterogeneity within investor groups, the more targeted the programs are, the more effective they are likely to be. 

Advertisement