Financial Literacy -> Financial Behavior?
Dr Bob Explains Series on Financial Topics
In an earlier life I led a team that crisscrossed the country giving seminars to employees of large client companies. We taught on factory floors, around-the-clock during shift breaks, and really, as long as it was safe, anywhere and anytime we could organize an audience with the employees. Our goal? Get them to opt into and save for retirement through their 401k plans. We were aiming to get them to change their financial behaviors.
We had good successes, partly because employee participation at many of these companies was coming off of low bases. Years after I’d left that job, employers turned more toward designing their retirement plans in ways to guide financial behavior. Why? Because education programs alone were falling short.
So re-designed 401k plans began to feature automatic enrollment, a default contribution rate, default investment, even automatic contribution escalation. These changes in the design of 401k plans dramatically altered employee savings behavior. The emphasis was now less about education and motivation, or logic and emotion. Drawing on behavioral economics and the notion of “nudging,” the emphasis had shifted to shaping the pathway for employees’ financial behavior. Rather than have employees opt in to their 401k plans—and have them make multiple decisions along the way, such as how much to save and what investments to pick in what percentages—they could be saving by default, unless they opted out.
Does financial knowledge matter? Does financial education help? Yes, and I say so not only because I am an educator. But, and this is an important “but,” effectiveness can be limited when the measure of success is sustained change in financial behavior.
Today, as one of the largest generations in history steps into their 50s, 60s, and 70s and remain active into their 80s and 90s, a retirement crisis may be looming. A senior executive of Blackstone and a labor economist caution that we could be entering a period of elderly poverty not seen since the Great Depression. The underlying cause? A decline in traditional pension plans, a structural change that forced employees to bear the weight of getting motivated and learning about and altering their financial behavior. This responsibility and burden extends to all generations, including millennial employees in their 20’s and 30’s who may also be staring at large student loan bills. While a return to traditional pension plans that guarantee a retirement income is unlikely, ideas to stem the retirement crisis such as a guaranteed retirement account and SeLFIES continue to emphasize ease, simplicity, and nudging. Individual responsibility won’t go away. And so when we seek to change financial behavior, whether our own, a family member’s or friend’s, it can help to apply a combination of reasoning, emotional appeal, and shaping and smoothing the path. The latter could include removing obstacles for the 1st and most important step and taking baby steps to continue to sustainable change.
Disclosure: This commentary is furnished for the use of Glen Eagle Advisors and its clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle Advisors representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary. The Chartered Financial Analyst (CFA) designation is conferred by the CFA Institute.