Academic journal article Economic Inquiry

Employee Financial Literacy and Retirement Plan Behavior: A Case Study

Academic journal article Economic Inquiry

Employee Financial Literacy and Retirement Plan Behavior: A Case Study

Article excerpt


Employers offer pension plans in the workplace to attract, retain, motivate, and ultimately retire their employees. Nevertheless, many workers are quite uninformed about financial matters, both in the United States and around the world (Lusardi and Mitchell 2014). Unless employees understand their plans and the incentives imbedded 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.

Previous evidence has shown that workplace-based financial education programs can be beneficial. For instance, Allen et al. (2016) assessed employer-provided retirement seminars and showed that these seminars boosted financial literacy and influenced people's ability to plan for retirement.1 In our previous research (Clark, Lusardi, and Mitchell 2015; Lusardi, Michaud, and Mitchell 2016), we examined whether financial literacy is linked to investment returns and we found that more financially literate employees are better investors. Moreover, the higher returns earned by the more financially savvy are an important contributor to household wealth inequality.

Nevertheless, few studies to date have focused on how employer-provided learning modules can shape pension plan participation, contributions, and investment patterns. Below, we use a unique dataset on employees of the U.S. Federal Reserve (FR) System provided by the Office of Employee Benefits of the Federal Reserve System (OEB). These data were collected in connection with an on-line employer-provided educational module (hereafter, the Learning Module), which included a survey inquiring about FR employees' financial literacy. 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 (DC) plan. Specifically, we combine administrative records with a survey evaluating workers' financial knowledge. With these data, we can examine whether financial literacy is associated with higher participation and contribution rates in the employer plan. We also evaluate, for those who participate in the program, whether financial literacy influences saving responses after exposure to a learning module.

As one might expect, we find that FR employees perform better on the financial literacy survey compared to average Americans, and they also save at substantially higher rates. As in other studies, marital status, salary, tenure, and financial literacy are all associated with greater plan participation, and DC contribution levels are influenced by workers' age, salary, and financial literacy. We also find that more financially knowledgeable employees are much more likely to participate in their retirement saving plan, contribute a higher percentage of their salaries, and hold more equity in their DC retirement accounts. While this correlation is not definitively causal, we present some results suggesting that the relationships are real and not merely associations.

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 FR employees. Of those not participating in the retirement savings plan at baseline, employees who took the Learning 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 chance of stopping contributions, or half that of their counterparts. We also find that those who took the Module contributed 1.0% more of their salaries post-Module, for an improvement of 12%, and they boosted their equity share by 3.7 percentage points (compared to a baseline of 57. …

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