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Academics Propose Mandated Employer Education on Financial Literacy

A recent study proposes that employers educate their employees in order to improve financial literacy. Research cited by professors at the University of Pennsylvania and University of Washington shows that people who are exposed to investment decisions solely because of their participation in an employer-sponsored 401(k) plan are poorly equipped to make sound investment decisions. These “workplace-only investors” have retirement accounts through their employers in which they get to choose how the money is invested but do not have any other type of retirement accounts. Active investors, on the other hand, made decisions about their investments outside of an employer-provided retirement account. The researchers found that workplace-only investors displayed a strikingly low level of financial literacy when asked questions measuring basic financial knowledge and questions that dealt with more complex topics such as compound interest. Specifically, only slightly more than one third (37 percent) of workplace-only investors have some basic financial knowledge and only 35 percent can answer the question about compound interest correctly. “This lack of financial literacy is critical both because of the financial consequences of poor financial decisions and because of a legal structure that relies on participant choice to limit the fiduciary obligations of the employer with respect to the structure and options provided by the retirement plan,” the professors write. They present two policy options: (1) Impose greater obligations on employers, through ERISA for example, to ensure that their employees are investing appropriately for retirement; or (2) Mandate financial education, through ERISA or the Department of Labor, as a component of employer-provided defined contribution plans. “Formalizing the employer role in evaluating and increasing financial literacy among plan participants is a key step in providing retirement plan participants with the resources necessary to manage important decisions regarding retirement planning and, ultimately, for enhancing the financial security of American workers,” the professors write.

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