Investor Financial Literacy in the Workplace

43 Pages Posted: 13 Nov 2016

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: September 2, 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 an exploratory study that asked subjects to complete a simulated retirement investment task and collected information about their financial knowledge and preferences. The study enabled us to measure financial literacy and evaluate its relationship to retirement investment decision-making. In line with existing research, we found a strong relationship between financial literacy and successful retirement investing. Our results suggest, however, that the relevant understanding in this context is not about math so much as it is a basic knowledge of the relative costs and benefits of the major investment categories. Finally, we present results suggesting that financial literacy is separate from investment preferences — specifically, that tolerance for risk is a separate and highly predictive variable in estimating retirement planning success.

Our research suggests that individual employees are likely to lack the skills necessary to support the current regulatory model of participant-directed retirement investing. The structure and regulation of retirement plans ought to take this fact seriously. We explore the potential for investor education and professional advice, respectively, to overcome the limitations of individualized choice.

Suggested Citation

Fisch, Jill E. and Wilkinson-Ryan, Tess and Irvine, Krin, Investor Financial Literacy in the Workplace (September 2, 2016). CFS Working Paper No. 554. Available at SSRN: https://ssrn.com/abstract=2865884 or http://dx.doi.org/10.2139/ssrn.2865884

Jill E. Fisch (Contact Author)

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

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

Chicago, IL
United States

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