Financial Literacy and Trust Issues Impact Participation Rates

November 27, 2007 ( - New research from the Center for Retirement Research at Boston College shows financial literacy and mistrust of financial institutions can have an impact on employee decisions to participate in 401(k) plans.

Results of the study show financial literacy strongly affects participation in both voluntary participation plans and those with automatic enrollment. An individual with low literacy is 34% less likely to participate in a voluntary plan and 11% less likely to participate in a plan with automatic enrollment, according to the research paper.

Mistrust of financial institutions did not seem to significantly impact participation in voluntary enrollment plans, but an individual with low trust is 12% less likely to participate in a plan with automatic enrollment, according to the research. Researchers suggested procrastination can have a greater effect on participation in voluntary plans than mistrust.

The financial literacy measure used in the study was derived from an eight-question quiz that included three basic financial knowledge questions and five questions related to 401(k) plan knowledge. Based on their responses, individuals were separated into a ‘low’ literacy group (0-5 correct answers) and a ‘high’ literacy group (6-8 correct answers), the paper said. Overall, 42% of survey respondents were in the low literacy group.

To measure mistrust, survey respondents were asked how they feel about the following statement: “For the most part, financial institutions are trustworthy.” According to the research paper, low trust participants were those who answered ‘disagree’ or ‘strongly disagree,’ and high trust participants were those answering ‘neither agree nor disagree,’ ‘agree,’ ‘strongly agree,’ or ‘no response.’ Overall, 14% of survey respondents are in the low trust group.

While other research has shown that other factors such as salary level and behavioral issues affect participation levels, the Center’s researchers point out that their research highlights the importance of 401(k) education in the workplace. By increasing financial literacy, increased employee education is likely to enhance voluntary 401(k) participation and reduce quit rates in automatic enrollment plans.

Researchers suggested employers also consider efforts to reduce employee mistrust of finan­cial institutions as part of ongoing commu­nications about the plan and its features.

The paper, Do Financial Literacy and Mistrust Affect 401(k) Participation?, is here .