Financial literacy increases with age, a survey by State Street Global Advisors (SSGA) suggests.
For example, 91% of Generation X ages 45 to 50 answered this question correctly: If you invested $100 in a savings account with a 2% interest rate, how much would you have after five years? In comparison, 71% of Millennials answered correctly.
Similarly, when asked whether it was true or false that “buying a single company stock usually provides a safer return than a stock mutual fund,” 55% of Millennials ages 22 to 32 incorrectly said “true,” but only 23% of Gen Xers ages 45 to 50 incorrectly said “true.”
Fredrik Axsater, SSGA’s head of global defined contribution (DC) in San Francisco, speculates that as people get more hands-on financial experience as they age, financial literacy and decisionmaking improves. He says studies show financial literacy increases over time.
“I think that across age cohorts there are relatively few people who have knowledge, interest and time to increase financial literacy. We need to make it easier for this silent majority that is looking for help and simplicity in getting started and doing the right thing,” he tells PLANSPONSOR.NEXT: Making education more effective
Axsater suggests that one great financial experience is being part of a retirement plan at a young age, and he sees five ways to make education more effective.
Financial literacy should focus on rules of thumb. For example, he says, just as there are nutritional guidelines, there need to be some retirement guidelines, such as saving up to 15% including employer contributions. In SSGA’s survey, 60% of Gen X and Millennials indicated they use rules of thumb in making financial decisions. Education needs to be clear about what the rules of thumb are.
Education should meet employees where they are, Axsater says. It should use simple language, not industry jargon and complex lingo. “Eighty-eight percent of Millennials say it’s important to start saving early,” he says. “They want to make this work, and education should help them ‘get it.’”
Plan sponsors should define inflection points—times when most participants are open to financial literacy and education. For example, when starting a job, buying a house or having children.
Plan sponsors should simplify entry points in their retirement plans. The industry has made great strides in automation, Axsater says, but entry points should be reoccurring. Even if a participant is automatically enrolled, he should receive messages every year or so, encouraging him to increase savings or revisit investments, for example.
Finally, Axsater says plan sponsors should offer financial education tools as part of their defined contribution plan offering.