Academic journal article Financial Services Review

Low-Income Employees: The Relationship between Information from Formal Advisors and Financial Behaviors

Academic journal article Financial Services Review

Low-Income Employees: The Relationship between Information from Formal Advisors and Financial Behaviors

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Over the last few decades, American corporations have transitioned from a defined benefit environment to a defined contribution environment, making employees largely responsible for their own financial affairs (Garman and Kim, 2003; Gonyea, 2007; Krajnak, Bums, and Natchek, 2008). In a defined benefit pension plan, employers are responsible for providing retirement income for the employee and, therefore, employers bear the investment risk associated with their retirement portfolio (Olsen and VanDerhei, 1997). Conversely, a defined contribution plan shifts the majority of this responsibility and risk associated with retirement savings from the employer to the employee (Garman and Kim, 2003; Gonyea, 2007; Olsen and VanDerhei, 1997). Subsequently, employees are now responsible for their retirement planning and have to decide how much to save, when to save, and how to invest their funds (Gonyea, 2007). However, many employees are not prepared for this responsibility, and employers have provided little education to assist employees (Garman and Kim, 2003) .

Specifically, low-income employees have been the most adversely affected by this transition and face the greatest risk of being unprepared for retirement (Kijakazi, 2003; Munnell, Golub-Sass, Perun, and Webb, 2007). As a result, low-income employees may enter retirement with little or no savings because they typically have difficulties saving for retirement (Gonyea, 2007; Kijakazi, 2003). Further, research finds that only 23% of households in the bottom third of the income distribution participate in employer retirement plans, compared to 66% of households in the top third (Munnell et al., 2007). While low-income employees may receive a larger proportionate Social Security benefit based on their Average Indexed Monthly Earnings, still the absence of liquid savings in retirement presents challenges (Gonyea, 2007).

Compounding this dire situation, low-income employees also lack the financial knowledge and skills needed to make sound financial decisions to achieve their financial goals (Rand, 2004) . For this reason, low-income employees often live from paycheck to paycheck, carry high-cost debt, and are unaware of consumer rights and services that could improve their financial circumstances (Rand, 2004). Oftentimes, these individuals fall prey to financial scams and predatory lenders partly because they lack the financial savvy to protect themselves (Lyons and Scherpf, 2004). Thus, the combined challenge of low incomes and poor financial behaviors warrants a focus on low-income employees and prompts the following research question: Could information from formal advisors positively affect the financial behaviors of low-income employees?

The purpose of this study is to examine the relationship between low-income employees' use of information from formal advisors and their financial behaviors. Formal advisors include financial planners, bankers, brokers, accountants, insurance agents, lawyers, and employers. Researchers assume that financial information from any one of these formal advisors, specific to a client's needs, could have a positive impact on financial decisions and on the financial behaviors of low-income employees. The study's research hypothesis is as follows:

H1, : A significant and positive relationship exists between the use of financial information from formal advisors and the acceptable savings and acceptable cash-flow management behaviors of low-income employees.

Hl0: A significant and positive relationship does not exist between the use of financial information from formal advisors and the acceptable savings and acceptable cash-flow management behaviors of low-income employees.

This study is important because it adds to the body of research relating to the financial behaviors of low-income employees as well as the body of research relating to the effectiveness of financial advice or financial information provided by formal advisors. …

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