The trouble with financial literacy

Financial literacy education is a mom-and-apple-pie proposition – who can be opposed to getting smarter about money? But I’m struck often by just how much the topic rings hollow as a solution to the retirement security crisis we’re facing.

This week’s Reuters column looks at two recent studies touching on this topic.

The American College of Financial Services graded 80 percent of Americans with nest eggs of at least $100,000 with an “F” on a test about managing retirement savings. The college, which trains financial planners, asked over 1,000 60- to 75-year-olds about topics like safe retirement withdrawal rates, investment and longevity risk.

Seven in 10 had never heard of the “4 percent rule,” which holds that you can safely withdraw that amount annually in retirement. Very few understood the risk of investing in bonds. Only 39 percent knew that a bond’s value falls when interest rates rise – a key risk for bondholders in this ultra-low-rate environment.

Meanwhile, a recent Towers Watson survey of 401(k) plan sponsors found rising levels of worry about employee retirement readiness. Just 12 percent of respondents say workers know how much they need for retirement; 20 percent said their employees are comfortable making investment decisions. Many 401(k) plans have added features in recent years that aim to put the plane back on autopilot: automatic enrollment, auto-escalation of contributions and target date funds that adjust your level of risk as retirement approaches. But none of that seems to be moving the needle much – and the study calls for redoubled efforts to educate workers.

Some retirement policy experts have attempted to make the case that there is no retirement crisis, but the case seems clear. The Federal Reserve’s latest Survey of Consumer Finances, released in September, found that ownership of retirement plans has fallen sharply in recent years, and that low-income households have almost no savings. Simply put, that’s because they have no available funds to save and many aren’t covered by workplace plans. So, financial literacy smacks of

For middle- and higher-income households, something else is at work: an inability – and lack of interest – in self-managed retirement.

Investing expert William Bernstein put it this way in a recent interview with Christine Benz at Morningstar (click here for video):

The current system that we have now for most people, Christine, is like getting on to the airplane and instead of turning right after you get into the door and going to your seat, you’re told, “No, you’re going to turn left and go into the pilot seat and fly the plane to Los Angeles.” And that’s not too extreme of an analogy because I’ve known airline pilots who couldn’t invest their way out of the paper bag. Investing is not easy and to expect the average person to run their own retirement portfolio, I think, is patently absurd.

Falling ShortFor perspective, I spoke this week with Alicia Munnell, one of the nation’s top experts on retirement policy. She is the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management, and serves as the director of the Center for Retirement Research (CRR) at the college. Munnell also is co-author of Falling Short: The Coming Retirement Crisis and What to Do About It (Oxford University Press, December 2014), a very concise and well-focused analysis of elements of the retirement crisis and possible solutions. Munnell’s co-authors are Charles Ellis, the investing expert, and Andrew Eschtruth, an associate director at CRR.

Like me, Munnell is skeptical that education is the key issue. The idea that people should have to understand things like the 4 percent withdrawal rate, or how the bond market works, to enjoy a secure retirement, just makes no sense. It carries a subtle blame-the-victim message that I consider dead wrong.

For higher-income households, she believes that solutions lie in tighter 401(k) design and mandatory participation; lower-income households will rely primarily on Social Security – so benefits must be maintained or even expanded for this group.

Some of her comments are included in the column; here’s an expanded Q&A of our conversation.

Click for more . . .

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