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


This study investigates the financial literacy of low-income employees, by examining their financial behaviors. Thus, researchers examine the effect that information from formal advisors has on the financial behaviors of low-income employees. In this study, formal advisors include financial planners, bankers, brokers, employers, accountants, insurance agents, and lawyers. Using data from the 2010 Survey of Consumer Finances, researchers find a significant and positive relationship between the use of information from formal advisors and low-income employees' positive financial behaviors. In other words, low-income employees who use information from formal advisors exhibit better financial behaviors than those who do not. © 2014 Academy of Financial Services. All rights reserved.

Jel classification: D14

Keywords: Financial behaviors; Low-income employees; Financial information

(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. …

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