A U.S. News and World Report article by financial planner Hal Bundrick calls 401(k) education the biggest failure of adult education in history. Based on the number of people affected, the money spent and the stakes, that statement is not an exaggeration. So why has it failed, and what can be done?
Some of the reasons for the failure include:
• Some education is just a thinly veiled sales pitch. In a 2011 report, for example, the GAO noted: “Although investment education is defined as generalized investment information, providers may highlight their own funds as examples of investments available within asset classes even though they may have a financial interest in the funds.”
• Don’t blame adult educators, since they are not involved; nor are instructional designers. Why would record keepers, money managers and financial advisors think they are good at educating adults?
• Fear, inertia and irrationality are inhibitors to learning. Rather than overload people with information in a language they don’t understand and warn them about the dire consequences, behavioral economic experts like UCLA Professor Shlomo Benartzi have helped design better ways to improve outcomes by doing it for participants through auto-plan features. Benartzi’s work has arguably had more impact than the billions (maybe tens of billions) of dollars spent on 401(k) education.
• Adults don’t learn by reading, especially online, or by listening to experts. Rather, they learn by interacting with their peers. In a study of 201 white papers by three academics at the University of Colorado, the University of Virginia and Catholic University, the authors found that financial education accounted for just a fractional (0.1%) change in behavior.
So what does Bundrick recommend?
• Recruit teachers and instructional designers. There’s a lot of cutting edge work being done in the fields of adult education and online instructional design.
• Do “just-in-time education,” which the academic research shows is more effective.
• Eliminate the jargon, hoping that investors will understand the way the financial world explains things; and put it into terms that most people understand.
The bottom line: People want to drop off their car to get the oil changed, not learn how to do it themselves. Advisors should focus on giving advice, not becoming adult educators — a responsibility for which they have little or no training; and providers with proprietary products to sell should be eliminated entirely from providing education.
The failure of participant education is a big deal, and there are many ways to view it. In a post coming in this Friday’s Daily, Warren Cormier offers another take.
