Financial Knowledge and 401(K) Investment Performance
31 Pages Posted: 27 Mar 2015 Last revised: 28 Mar 2015
Date Written: May 3, 2014
Using a unique new data set linking administrative data on investment performance and financial knowledge, we examine whether investors who are more financially knowledgeable earn more on their retirement plan investments, compared to their less sophisticated counterparts. We find that risk-adjusted annual expected returns are 130 basis points higher for the most financially knowledgeable employees, and those scoring higher on our Financial Knowledge Index have slightly more volatile portfolios while they do no better diversifying their portfolios than their peers. Overall, financial knowledge does appear to help people invest more profitably; this may provide a rationale for efforts to enhance financial knowledge in the population at large.
Keywords: financial knowledge, retirement planning, investment performance
JEL Classification: D14, D91
Suggested Citation: Suggested Citation