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How to Make Financial Education Work

Poor savings rates, high debt levels, the frequent incidence of living paycheck to paycheck — all are among the ingredients in the recipe for financial stress. Financial education can be an antidote, but not in the traditional ways it is provided, suggests a recent study.

In “So Many Courses, So Little Progress: Why Financial Education Doesn't Work — And What Does,” Dr. Martha Brown Menard writes for the financial planning firm Questis that given current conditions, “it seems like a good idea for employers to provide some type of education” but that “one-size-fits-all financial education has been demonstrated to have little to no effect on changing real-world financial behaviors.” Instead, argues Menard, “other types of interventions are showing much more promise to effect change.”

Lacking as Practiced

The need to increase financial literacy “seems like an obvious solution,” writes Menard, but “like many obvious solutions, upon closer inspection it’s clear that financial education alone hasn’t worked — and perhaps it never can.” She suggests that this is because “the way our brains are wired to process information typically works against us when it comes to making sound financial decisions, and changing behavior takes more than a single class.”

This view is not hers alone. Menard reports that George Washington University School of Business economist Annamaria Lusardi has said that “A one-time financial education effort seems unlikely to actually change habitual long term decisions and behaviors.” The Consumer Financial Protection Bureau (CFPB) shares that view, she points out, citing a 2016 NPR broadcast in which the CFPB said that, “There’s no clear link between taking personal finance classes and saving more, paying off debts or raising your credit score.”

Menard says that “multiple academic studies have shown that claims of a cause and effect relationship between financial education and improved financial behaviors have very little evidence to support them” and that recent research concerning 90 studies found that additional factors can enhance the effectiveness of financial education, including a person’s level of familiarity with numerical concepts, their willingness to take a risk and their financial confidence.

“One of the problems with financial education,” says Menard, “is that it can become obsolete in a relatively short span of time,” adding that “new financial products are engineered and introduced more quickly than organizations offering financial education can keep up with them.” She argues that “old rules of thumb” are not sufficient now. Other problems, she says, are:

  • a cognitive bias to lend more importance to present needs and wants than those in the distant future;

  • overconfidence;

  • a tendency to hold on to the first bit of information one acquires as a baseline for comparison;

  • a bias toward new information that confirms preconceived notions, and to ignore evidence that contradicts them; and

  • loss aversion.

What To Do

One answer, Menard suggests, is financial coaching, which she says employs techniques that are “consistent with the concepts and principles of effective behavioral change” and which “differs from traditional financial advising in that it tends to focus more on allowing client-centered goals to guide the process, rather than only providing specific expert advice or recommendations.” While she acknowledges that it is “a relatively new field,” Menard says that it is “showing promising evidence.”

The CFPB also offers some ideas, Menard says. She cites a 2017 CFPB report in which it sets forth five principles of financial education that can lead to greater success:

  • Tailor information to individuals’ specific circumstances, challenges, goals and situations.

  • Provide timely information that is relevant and that can be used to address a specific situation or meet a specific goal.

  • Build general skills such as knowing where to obtain reliable information and how to process it.

  • Build individuals’ confidence regarding meeting financial goals and support their ability to focus on their standards and values, and to persevere when challenged.

  • Help create habit and systems that make it easy for individuals to implement their decisions.

Menard suggests that employers and retirement plan professionals that are pondering instituting a financial education program may find the following considerations helpful:

  • What does the financial education look like? Will it work for our organization?

  • Does the program offer access to human coaches or advisors?

  • What problems will the program address? How does it help employees to address their financial needs and set goals?

  • Is there mechanism that encourages employees to be accountable about their financial decisions?

  • Does the program include a way for employees to estimate their income during retirement?

Menard’s paper may be very timely, at least if Voya is correct in its recent report on financial benefit trends it anticipates in 2018. Voya’s expectations include more employers adding financial education benefits and that employers will begin looking for ways to provide financial education to future generations.