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401k Participants Lack Education in Investment Matters




Business Economics, January 2007 by Olivia S. Mitchell, Annamaria Lusardi
Summary:
Economists are beginning to investigate the causes and consequences of financial illiteracy to better understand why retirement planning is lacking and why so many households arrive close to retirement with little or no wealth. Our review reveals that many households are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions. Such financial illiteracy is widespread: the young and older people in the United States and other countries appear woefully under-informed about basic financial concepts, with serious implications for saving, retirement planning, mortgages, and other decisions. In response, governments and several nonprofit organizations have undertaken initiatives to enhance financial literacy. The experience of other countries, including a saving campaign in Japan as well as the Swedish pension privatization program, offers insights into possible roles for financial literacy and saving programs.

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Excerpt from Article:

Economists are beginning to investigate the causes and consequences of financial illiteracy to better understand why retirement planning is lacking and why so many households arrive close to retirement with little or no wealth. Our review reveals that many households are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions. Such financial illiteracy is widespread: the young and older people in the United States and other countries appear woefully under-informed about basic financial concepts, with serious implications for saving, retirement planning, mortgages, and other decisions. In response, governments and several nonprofit organizations have undertaken initiatives to enhance financial literacy. The experience of other countries, including a saving campaign in Japan as well as the Swedish pension privatization program, offers insights into possible roles for financial literacy and saving programs.

Workers and retirees have increasingly been asked to take on an unprecedented degree of responsibility for their retirement and other saving, as defined benefit pensions decline and government programs face insolvency in one country after another. As a result, consumers now confront a bewildering array of financial decisions and a wide range of financial products ranging from 401(k) plans to Roth to regular Individual Retirement Accounts, phased withdrawal plans to annuities, and many more. This process implies that it is becoming ever more important for households to acquire and manage economic know-how. But in practice, there is widespread financial illiteracy; many households are unfamiliar with even the most basic economic concepts needed to make sensible saving and investment decisions. This has serious implications for saving, retirement planning, retirement, mortgage, and other decisions, and it highlights a role for government, employers, and financial institutions working to boost financial literacy and education in the population. The Organization for Economic Cooperation and Development (OECD, 2005) defines "financial education" as:

"The process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction, and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being."

Building upon this definition, we provide a review of the current state of financial literacy and financial education programs and discuss whether consumers/investors appear to possess the financial literacy necessary to process financial information and formulate adequate saving plans. We also offer some examples of efforts to enhance financial literacy.

 

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