I recently read that financial literacy in America has fallen to its lowest level in a decade. Americans answered less than half of basic financial literacy questions correctly, and younger generations performed even worse. The numbers are concerning, but they don’t surprise me.
I’ve spent more than twenty-five years in the retirement plan business. If there is one thing I’ve learned, it’s that we often assume participants know more than they actually do. They don’t.
Many participants don’t understand compound interest. They don’t understand inflation. They don’t understand investment risk. They don’t understand the difference between a traditional pre-tax contribution and a Roth contribution. Most importantly, many don’t understand how much money they need to save to retire comfortably.
The retirement plan industry sometimes acts as if technology can solve every problem. We build better websites. We create mobile apps. We add calculators and interactive tools. Those things are helpful, but technology cannot overcome a lack of basic financial knowledge.
The reality is that many participants are making decisions without understanding the consequences. Some avoid participating because they believe they can’t afford to contribute. Others keep all their money in stable value or money market funds because they are afraid of market volatility. Still others take loans or hardship withdrawals without fully appreciating the long-term impact on retirement readiness.
This is why participant education remains so important.
For plan providers, financial literacy should not be viewed as someone else’s responsibility. Every enrollment meeting, every educational presentation, every participant call, and every communication represents an opportunity to help someone make a better financial decision.
The study also found that retirement-specific knowledge remains alarmingly low. That should concern every provider because defined contribution plans place significant responsibility on participants. The more responsibility participants have, the more important financial literacy becomes.
The retirement plan industry has spent decades focusing on plan design, investment menus, fees, and technology. Those issues matter. But none of them can fully compensate for a participant who lacks a basic understanding of personal finance.
Financial literacy is not a side issue. It is one of the foundations of retirement security.
If Americans are becoming less financially literate, the retirement plan industry needs to do a better job educating participants. Because at the end of the day, a great retirement plan only works if participants understand how to use it.