Financial Illiteracy and the Great 401(k) Experiment

Financial Illiteracy and the Great 401k Experiment

Note: This is the second part of a month-long series on financial awareness in the U.S., 401(k) plans, and how investors are planning – or not preparing – for retirement. If you have an employer-sponsored retirement plan, read on for insights on how a lack of financial education can tie into people’s experiences with their 401(k) plans.

Financial Literacy: A Must for Retirement Success

Financial wellness is the ground-spring for a happy and financially secure retirement. As common sense may indicate, this begins with well-informed retirement planning decisions. But many Americans fall short in their knowledge of even the basics, as numerous consumer surveys document, year after year. And in turn, this knowledge gap can lead into broken retirement dreams: crushing debt, depletion of savings, scaled-back lifestyles, and other headaches that undermine Americans’ post-work standard of living.

401(k)s and Their Retirement Saving Influence

Perhaps not surprisingly, consumer surveys show that even those actively saving in 401(k)s, as well as in other workplace saving plans, also struggle in their financial knowledge and retirement readiness. It’s a noteworthy trend, considering that the 401(k) is one of the primary retirement savings vehicles in the United States.

According to research from Charles Schwab, 7 out of 10 of 401(k) plan participants say they will be relying on their 401(k) as their “main or only” source of retirement income outside of Social Security. And in a recent analysis of 401(k) data from the Department of Labor (courtesy of Brightscope and the Investment Company Institute), nearly 63 million U.S. workers were covered by 401(k) plans in 2014.

Moreover, 401(k) plan assets have accounted for almost one-fifth of total U.S. retirement assets in more recent times. As of December 31, 2016, $4.8 trillion was held in 401(k) plans, the Investment Company Institute reports.

So, what are the struggles that Americans with 401(k)s wrestle with?

Retirement Education and Readiness Challenges for 401(k) Owners

Recall the Charles Schwab research, which indicated 70% of retirement savers planned to use their 401(k)s as a top income source. This finding conflicted with other findings, suggesting a disconnect between investor expectations, their actual knowledge of specific plan details, and how they actually managed their plans.

Now, before getting into specifics, it’s important to look over the consumer population used for the survey. It was a nationally representative sample of participants in 401(k) plans, with the following demographics:

  • The plan participants were about 20 years away from retirement, on average
  • On average their household income was $96,000
  • On average, they had $171,000 saved for retirement

At the time, national medians for household income and retirement savings were about $60,000 and $25,000, respectively. The study population demographics are notably higher. It would suggest these 401(k) savers had a higher level of retirement planning knowledge and engagement than the average investor nationally.

Nevertheless, the researchers uncovered surprising findings, in the 401(k) participants’ knowledge:

  • 30% weren’t aware they paid any fees for their 401(k) plans
  • 67% said they didn’t know about plan administration fees
  • 95% didn’t know about investment fund operating expenses
  • 56% weren’t aware of or didn’t review plan-related educational materials, even though a substantial majority of 401(k) plan sponsors planned interactive retirement tools, printed and digital educational content, and live educational events
  • 52% of plan participants said they don’t have the “time, knowledge, or experience” to manage their 401(k) plans

And with this knowledge gap, there was also a noticeable trend concerning how much time people invest in reviewing and managing their 401(k) plans:

  • 45% said they spend less than 4 hours managing their 401(k) plan – 4 hours of 8,760 hours in a year, or 0.00457% of the time.
  • 70% said they spend less than 8 hours per year – 8 hours out of 8,760 hours in a year, or 0.00913% of the time.

These findings align with other survey data of 401(k) investors. Last week’s post highlighted stunning insights, such as how 66% of Americans can’t even name their 401(k) plan provider, and how these shortfalls could translate into subpar retirement readiness.

Arguably, part of the disconnect stems from financial illiteracy. Not in the sense of ignorance, but rather unfamiliarity with the principles of personal finance and money management. It’s here where retirement planning success can start.

Financial Illiteracy and Its Crippling Effects in the U.S.

Jim Chilton is the President of The Society for Financial Awareness, a national 501c(3) public benefit organization. For April, National Financial Literacy Month, is teaching up with SOFA to help end financial illiteracy in America, one community at a time.

In a recent interview with the San Diego Union-Tribune, Chilton talked about how financial illiteracy leads to poor life outcomes, scaled-back retirement living, and potentially financial demise. You can see his interview by clicking on the picture below.

Chilton photo

Pointing to how other behaviors could harm us, Chilton said a spending addiction can likewise be detrimental: “…We don’t talk about spending as an addiction. Spending money makes us feel good and is habit forming. Our economy thrives on spending. Not enough people understand the importance of saving until it’s too late.”

In turn, this translates to a lack of financial planning. Chilton referred to research data that says just 3 out of 100 Americans have a written financial plan, which is a bedrock of financial discipline and peace of mind. “Like a GPS or North Star, a written financial plan helps them stay on track. The No. 1 cause of divorce is over money issues. There are mistakes constantly made by couples. Also, student loans have exceeded car debt and credit-card debt combined.”

“And then there’s stress. Our well-being can also crumble because of a staggering amount of debt that constricts us and sucks out our joy. You might have to move to a place with lesser cost of living, leaving family and friends behind. Money can absolutely ruin someone. You’ve got to build a financial plan. If you have to drive somewhere you’ve never been before, do you go without a map or GPS but only with the intention of driving?”

Get Personal Guidance with Your Financial Retirement Planning

Ending financial illiteracy, and financial under-preparation for retirement, begins with education. SOFA offers no-cost, content-rich educational seminars to churches, clubs, corporations, small businesses, and organizations of all types. Here, you can learn more about these seminars and how they can help your organization. Visit to book a community education workshop.

Should you need help with your own financial retirement planning, can assist you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Author: Ian

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