Financial Education Improves Retirement Savings Outcomes

Financial education improves plan participants’ knowledge and awareness about saving for retirement. 

A financial management course changed the retirement savings behavior of Army members, Harvard University John F. Kennedy School of Government Professor Brigitte C. Madrian said during a State Street Global Advisors (SSgA) media event detailing SSgA’s Defined Contribution Investor Survey. (See “DC Participants Want to Save More, Need Education and Help.”)

Before the course, participants had an 11% participation rate in the Federal Thrift Savings Plans during year one and 17% in year two. After the course, participants had a 27% participation rate in year one and 47% in year two.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Participants’ monthly contributions also increased following education. Before the course, participants set aside $15 in year one and $22 in year two. After the course, participants set aside $32 in year one and $56 in year two.

When teaching participants, Madrian said plan sponsors should use rule-of-thumb-based education. An example lesson could be on the appropriate amount of money to set aside for retirement. Using the rule-of-thumb approach, Madrian suggests that plan sponsors tell participants what percentage of their income they should save for retirement (she used 10% of income as an example).

Madrian said employers should offer classes during paid work hours to encourage employees to attend them.

 

(Cont...)

Kristi Mitchem, head of global defined contribution at SSgA, suggested that employers offer classes during convenient times such as breaks and lunch to increase attendance. Even offering promotional products with your company’s logo to participants can encourage employees to check out an event.

Participants’ preferences for financial education may vary, and could extend beyond traditional classroom settings. For example, Madrian said,“[S]ome people who are antisocial, they might prefer the Internet.”

Regardless of how employees gain financial knowledge, nobody is expecting participants to become the next George Soros or Warren Buffet. “We’re not all trained to be investment experts,” Mitchem acknowledged.

Madrian agreed, saying that participants can turn to those who specialize in investments, just as they turn to other professionals to solve problems in other aspects of their lives. “I don’t have to know how to fix a car. I take it into the auto body shop,” she said.

 

DC Participants Want to Save More, Need Education and Help

Employees across the United States are willing to save more for retirement and report that there is room in their budgets to do so.

 

However, many defined contribution (DC) investors are hampered by an “action gap” caused by the disconnect between understanding what is important and knowing how to take action, according to a survey of plan participants released by State Street Global Advisors (SSgA).  

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Seventy-eight percent of survey respondents reported they know it is important to determine how much to save for a secure retirement but only 33% claim to have the knowledge to determine that amount. The majority, 83%, of respondents said they could cut their household budget by at least 5% to save more–including 64% that said they could reduce their budget by 10% or more.   

In addition, 52% of respondents would be willing to increase their savings rate to as high as10% if their employer automatically increased their savings rate by 1% each year.   

The bi-annual SSgA Defined Contribution Investor Survey, conducted jointly with the Boston Research Group uncovered three findings that are especially important for helping employers and employees improve retirement outcomes for DC investors:  

 

  •  Savings willingness and elasticity, or flexibility in budgets to save more, are significant; 
  •  Participants display a significant “Action Gap” between understanding the need to take action and possessing the knowledge to do so; and
  •  Simplicity and repetition are key to engaging employees to help close the “Action Gap.”  

 

The survey found approximately 40% of respondents expressed uncertainty about the risk and return characteristics of common investments found in 401(k) plans, including international equity funds, stock index funds, and stable value funds. More than half of survey respondents admitted they do not know what target date funds (TDFs) are, or are not familiar with how they work.  

Approximately 67% know adjusting their investments over time is important, but only 30% say they know how to do this. In addition, 82% think it is important to know how to make retirement savings last a lifetime, but just 28% reported they know how to achieve this.  

“We believe the more we can help employers understand the reasons for the action gap, the better equipped they can be to help employees take steps to save more and invest more wisely,” said Kristi Mitchem, senior managing director and head of Global Defined Contribution for SSgA.  

The bi-annual SSgA Defined Contribution Investor Survey, conducted jointly with the Boston Research Group, surveyed more than 1,000 401(k), 403(b), 457 and profit sharing plan participants1 to identify their behaviors and perceptions about saving and investing.

 

«