Financial literacy in the NARPP study was measured using a widely accepted series of questions testing the participants’ ability to answer basic financial questions. Less than half (49%) of participants correctly answered the eight basic financial literacy questions.
In addition, NARPP found that few participants have a good understanding of common investing terms. For example, only 30% of participants said they understand very well the term “asset allocation,” and only 36% of participants said they understand very well the term “diversification.”
Participants seem aware of their lack of financial literacy. When asked to assess their own perceived literacy level, only one in five participants described themselves as knowledgeable about financial matters. The study also found only 38% of participants are satisfied with the financial education programs from their respective providers.
The purpose of the participant study was not only to understand levels of financial literacy, but also to assess its impact on savings behavior. NARPP says the study sets a baseline of financial literacy among plan participants. It also ranks service providers’ education programs.
“There seems to be a big disconnect with what participants need in terms of financial information and education, and what they are receiving from their recordkeepers,” says Laurie Rowley, founder of NARPP. “At a time when service providers are selling education programs as part of their value proposition, I think it is critical to both employers and employees to be able to measure the impact of these programs.”
Rowley says NARPP has started working with plan sponsors to help them assess their employees’ level of financial literacy and savings behavior so they can begin to strategize for better retirement savings outcomes for their participants.
The study shows participants’ level of financial literacy and level of confidence in being able to amass sufficient financial resources to comfortably retire are key drivers of deferral rates (see “Recordkeepers Have Strong Influence on Participant Outcomes”).
Information about the study can be requested by emailing firstname.lastname@example.org.