With more states and municipalities stepping in (finally) to include financial literacy in public education, a new paper argues employers should also play more of a role in addressing the subject.
The paper, from academics at UPenn and George Washington University, finds that individuals who only invest through a workplace plan are less literate in money matters than most, and it’s therefore incumbent on plan sponsors to do more.
“The challenge with this [DC] system is that U.S. employees are poorly equipped to make decisions about how to invest for retirement,” the authors note. “In addition to the initial decisions, effective retirement investing requires plan participants to evaluate whether to make changes to their portfolios over the course of their career and, when they retire, to determine how to manage the balance in their accounts to provide income for the rest of their lives.”
The complexity of appropriate retirement investing, they add, “is compounded by the fact that financial literacy rates in the general population are low.”
Remedies
Two possible remedies are then proposed, involving (of course) regulators.
In something certain to make sponsors swoon, the first is to impose greater ERISA responsibility on plan sponsors to “oversee the quality of employees’ retirement investing.”
The second is to require employers to evaluate “and remediate” the financial literacy of plan participants through investor education.
The authors argue for the second approach, concluding the latter is more “promising,}” and therefore call for the Department of Labor to require employer-sponsored financial education.
“The financial landscape and labor markets that employees face today have changed substantially, it is time to change the regulatory framework to equip workers with the knowledge and skills they need to make informed decisions about their pensions in the 21st century.”