The Knowledge Gap in Workplace Retirement Investing and the Role of Professional Advisors

40 Pages Posted: 11 Jul 2015 Last revised: 21 Feb 2017

See all articles by Jill E. Fisch

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics

Tess Wilkinson‐Ryan

University of Pennsylvania Law School

Krin Irvine

University of Chicago, Booth School of Business, Students

Date Written: 2016

Abstract

The dramatic shift from traditional pension plans to participant-directed 401(k) plans has increased the decision-making responsibility of individual investors for their own retirement planning. With this shift comes increasing evidence that investors are making poor decisions in choosing how much to save for retirement and in selecting among their investment options. Studies question the value of efforts to improve these decisions through regulatory reforms or investor education.

This article posits that deficiencies in workplace retirement savings cannot be adequately addressed until the reasons for poor investment decisions are better understood. We report the results of a study designed to simulate the retirement investment choices faced by those responsible for their own 401(k) plans. We construct a novel measure of financial literacy in order to test the relationship between financial literacy and investment choices. We also explore the explanatory power of other investor attributes such as gender, education and investment experience.

Our research reveals strong relationships between financial literacy, investor behavior, and investment outcomes. Importantly, financial literacy provides substantial explanatory power even when we control for other investor characteristics. We conclude that greater financial literacy is associated with better investment results. This provides support for future work aimed at developing methods to increase financial literacy in order to improve retirement investment behavior and outcomes.

Keywords: financial literacy, investor behavior, investor returns, empirical research, behavioral decision research, mutual funds, investor experience, investor knowledge

JEL Classification: D18, D83, G11, G14, G23, G28, K22

Suggested Citation

Fisch, Jill E. and Wilkinson-Ryan, Tess and Irvine, Krin, The Knowledge Gap in Workplace Retirement Investing and the Role of Professional Advisors (2016). Duke Law Journal, Vol. 66, P. 633, 2016; U of Penn, Inst for Law & Econ Research Paper No. 15-33. Available at SSRN: https://ssrn.com/abstract=2629464 or http://dx.doi.org/10.2139/ssrn.2629464

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

Tess Wilkinson-Ryan

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

Krin Irvine (Contact Author)

University of Chicago, Booth School of Business, Students ( email )

Chicago, IL
United States

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