Financial literacy in the age of the internet
Principal Global Investors and CREATE-Research are launching the first in a new series of papers at this year’s FundForum.
The paper, Financial Literacy: Smoothing the path to improved retirement savings, argues that just as the industrial age required employees to have print literacy - the ability to read and write — the Internet age requires financial literacy: the ability to reason and evaluate financial matters. This is because employees are increasingly responsible for their retirement in the same way they manage their careers.
In 2009, defined contribution (DC) plans held 41 per cent of global pension assets. By 2015, that shot up to 49 per cent. This rise was assisted by three innovations based on ‘nudge economics’: automatic enrollment of all eligible employees, automatic rise in their contribution rates over time, and a selection of default options that provide advice-embedded solutions such as target date funds.
Together, they are promoting the right behaviours in retirement planning. However, complementing these innovations with increased financial literacy would help counter two behavioural biases that hamper good retirement outcomes: short-termism and herding.
The current levels of financial literacy in the key retirement markets fall well short of what is required. They mainly aim to help employees manage their financial affairs, debt levels and rainy day savings. Retirement planning takes a back seat.
Research studies show all too clearly that higher financial literacy combined with plan designs that automate retirement savings deliver better retirement outcomes by sidestepping the most common mistakes in investing. Hence, plan participants can benefit when asset managers take part in financial education that focuses on investment basics.
Using the Internet, asset managers need to work closely with financial advisors and education providers to deliver jargon-free, emotionally engaging education based on real-life examples and credible scenarios.
Pick up your copy of the paper, available beginning June 6 and throughout FundForum.
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