Federal Thrift Savings Plan Offers Important DC Education Lessons

A new analysis uses data on all active employees of the Federal Reserve System to examine contribution behavior in the Thrift Saving Plans—granting insight into the behavior of DC plan populations with genuine financial expertise. 

The Pension Research Council recently examined the savings behavior of Federal Reserve System employees within the Thrift Savings Plan, linking the research to “a unique employee survey of economic/demographic factors including a set of financial literacy questions.”

The results are presented in “Employee Financial Literacy and Retirement Plan Behavior: A Case Study,” which finds, not too surprisingly, that Federal Reserve employees are substantially more financially literate than the Thrift plan population at large. This makes sense, researchers note, given the Federal Reserve’s key economic oversight role and the fact that the Thrift Savings Plan covers significant numbers of federal government employees doing many different types of daily work.

Zooming in on the Federal Reserve employees—who also widely have access to defined benefit pension planning options—researchers find widespread enthusiasm about the Thrift defined contribution (DC) plan, to the extent that Federal Reserve employees “contribute 3% more of their earnings to the plan than do the less knowledgeable.”

Federal Reserve employees further hold significantly more equity in their accounts than the general population, researchers find, underscoring the notion that knowledge about the markets is one of the most powerful tools to overcome emotion-based decisionmaking. 

Adding to the findings, the researchers also looked at a sample group of Fed employees who had completed a learning module about retirement planning and financial wellness. One year after completing the module, these employees were clearly much more likely to have started contributing to the plan if they had not already started, and they were also less likely to have stopped contributing to plan if they had previously opened an account.

According to the researchers, this shows financial wellness and retirement education can be beneficial even for employees who are already ostensibly knowledgeable about finances.

NEXT: Examining the findings 

This analysis is particularly informative given its unique data set, the researchers suggest. “These data were collected in connection with an online employer-provided educational module which included a survey inquiring about Federal Reserve employees’ financial literacy,” they explain. “The linked data allow us to study the saving and investment patterns of the more- versus less-financially literate segments of employees who were offered the opportunity to save in a defined contribution plan.”

The researchers combined additional administrative records with the survey data evaluating workers’ financial knowledge. With this process, they could “examine whether financial literacy is associated with higher participation and contribution rates in the employer plan. We could also evaluate, for those who participate in the program, whether financial literacy influences saving responses after exposure to a learning module.”

Clear results emerged from the analysis: “An important contribution of this research is that we show that participation in the learning module had large and significant effects on the retirement saving decisions of Federal Reserve employees. Of those not participating in the retirement savings plan at baseline, employees who took the module had a 4.6 probability of starting to contribute post-module, or 40% higher than their counterparts.” Of those who stopped participation, “those who took the module had a 3.8 percentage point change of stopping contributions, or half that of their counterparts.”

“We also find that those who took the module contributed 1.0 percent more of their salaries post module, for an improvement of 12 percent, and they boosted their equity share by 3.7 percentage points (compared to a baseline of 57.2 percent, or a 6.5 percent change),” the analysis shows. “When we attenuate potential sample selection issues using inverse propensity weighting, the increases in contributions and equity shares are even larger. Those taking the nodule contributed 11 percent of their salaries, more than doubling their pre-module rates, and increased their equity share by 6.3 percentage points, for an 11 percent change.”

The research concludes that, “unless employees understand their plans and the incentives embedded in them, they are unlikely to value them, save, invest, and manage their retirement portfolios appropriately. For this reason, employers have an interest in providing financial education to help workers better understand and make better decisions about their retirement savings.”

More information on the Pension Research Council is here