In basic 401k information, investment jargon needs to be eliminated or defined repeatedly. If employees don’t understand the words in 401k meetings or materials, not much learning will ensue.
So, what about employees who don’t understand the math their 401k educator is using? Math illiteracy might be a greater learning obstacle in 401k ed than jargon.
Numbers in 401ks
If employees are going to have an opportunity to be successful using a 401k as a retirement plan, they must know:
- How to create a realistic and meaningful estimate of the amount of money they’ll need in their account to fund the future lifestyle they’ll want,
- How much money they need to contribute to build their account,
- How to invest their account to supplement the account’s growth, and
- How to periodically withdraw from their account to have the income they want that will likely last their lifetime.
All these things involve numbers. Math is required.
Content Lovers Learn Better
French language lovers find the French language interesting and they’re motivated to learn it.
It’s the same for math lovers – senior management, investment specialist, financial professionals, et.al. They already know or readily learn the math involved in 401ks.
These math lovers may suffer the “Curse of Knowledge.” They don’t understand how some people find basic math difficult. And they don’t believe the math used in 401k ed could be a learning obstacle.
Unless your workforce consists only of math majors and math lovers, there’s a good chance you’ve got some math-challenged 401k participants. America is full of them.
Bad Numbers in Research
Pew Research found that young people in the U.S. who are moving into the workforce rank 30 out of 35 advanced industrial countries in mathematical skills.
The Educational Testing Service found that U.S. Millennials ranked last in math out of 22 leading industrial and cultural countries.
Bigger Numbers Seem Better
In the early 1980s, corporate management of the A&W restaurant chain wanted to outdo McDonalds’ Quarter Pounder. So they created the A&W One-Third Pound hamburger. During testing, people liked that it would be the same price as Quarter Pounder and taste better.
A&W launched a nation-wide marketing campaign to introduce the bigger burger.
And potential customers ignored it.
In follow-up focus group sessions, people were asked why, for the same price, would they not pick A&W’s new burger?
The answer, as cited by The New York Times: McDonalds’ Quarter Pounder was a better deal than A&W’s One-Third Pound burger…because the “4” (in 1/4) is larger than the “3” (in 1/3).
Large Numbers are More
The A&W failure shows, for too many Americans, larger numbers in fractions win.
When asked which is the most, Cornell University research found many people chose 5/10 over 3/6 – even when they know they are equivalent.
In a separate study, psychology researchers Britain Mills and Valerie F. Reyna found that even in picking odds, many people prefer 10-in-13 to 9-in-11.
And half of U.S. college students cannot correctly decide whether 1/5 is larger than 1/8, according to data published in Educational Psychologist.
Percent Problems
For many Americans, percentages are problematic.
An example of such flawed logic was printed in The New York Times. During a newscast, a meteorologist said there was a 50 percent chance of rain on Saturday and a 50 percent chance on Sunday. The news anchor summed it up: “So we can expect 100 percent chance of rain this weekend.”
Do many 401k participants believe that if their account drops 50 percent – but then jumps back up 50 percent – they’d be even? But 100 that drops 50 percent to 50…then that 50 goes up 50 percent (50 percent of 50 is 25) puts them at 75 – still 25 percent below 100.
According to the U.S. Department of Education, more than half of American adults cannot add the price of two items in a restaurant and calculate a tip. That’s why many restaurant receipts show calculated tip amounts.
The Center for Economic Literacy found two-thirds of respondents could not answer the following correctly: what remains if you subtract 25 percent from 8?
As a group, employees age 51 to 56 aren’t any better. In a study by Dartmouth College, when some were asked to calculate two years of 10 percent annual interest on $200 – 82 percent could not do it correctly.
On the other hand, research has confirmed the obvious; people with good math skills are more likely to also be good with their personal finances.
What Can Plan Sponsors Do?
Most organizations will likely have some innumerates. So how can plan sponsors help them use a 401k to retire?
The first step would be to convince the math-loving executives who manage the 401k that math is an obstacle for some employees.
You might tell them the A&W story or the research results of math proficiency. But be prepared for disbelief from the math-lovers.
Ask management to focus on who will not attend a basic 401k presentation or visit a 401k highlights website. Management or other math-loving employees will probably skip these. So perhaps management will agree to allow the math in basic 401k ed to be converted to non-number descriptive explanations the math-challenged will understand.
A 401k ed provider should be able to help. Perhaps they have already introduced visuals, simple charts, analogies and stories that have more impact for non-number lovers than numbers.
Ed providers may already be using presenters who understand how to communicate with number-challenged employees. For basic 401k ed, the presenters don’t need to be actuaries, investment analytics or others who may have succumbed to the Curse of Knowledge.
If you want to get serious, do a number audit. Start with a printout of the presentation and copies of all the basic 401k handouts and electronic media. As you go through these materials, draw a circle around each number you find. Ask the ed provider how are they certain the math-challenged employees understand it.
All employees – not just the number-lovers – deserve a 401k education that will help them learn how to use a 401k successfully. Plan sponsors should demand it.
Dennis Ackley consults with employers and plan sponsors to help employees understand, use and appreciate benefits, pay and HR programs. His benefit communication and retirement education programs have reached more than three million employees at hundreds of employers.